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3.0
Contents
Executive Summary 1
Considerations for Those Integrating ESG into the Investment Process 6
How to Use This Report 8
The ESG Integration Framework 10
Case Study Table 15
Section 1
Regional Analysis: Asia Pacific 17
1 Regional Analysis: Asia Pacific 18
Section 2
Market Analysis: Australia 23
2 The Impact of ESG Factors on Capital Markets and Investment
Practices: Survey Data 24
3 Drivers of and Barriers to ESG Integration: Survey Data and
Workshop Feedback 27
4 Trends in ESG Company Data 33
5 Investment Practices of Local Practitioners: Equities and
Fixed Income 37
6 Interview with an Australian Major Market Player: AustralianSuper 45
Section 3
Market Analysis: China 49
7 The Impact of ESG Factors on Capital Markets and
Investment Practices: Survey Data 50
8 Drivers of and Barriers to ESG Integration: Survey Data and
Workshop Feedback 53
9 Trends in ESG Company Data 60
10 Roundtable Interview on ESG Integration in China 64
11 Interview with a Chinese Major Market Player:
Harvest Fund Management 72
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Contents
Section 7
Market Analysis: Singapore 139
27 The Impact of ESG Factors on Capital Markets and Investment
Practices: Survey Data 140
28 Drivers of and Barriers to ESG Integration: Survey Data and
Workshop Feedback 143
29 Trends in ESG Company Data 147
30 Interview with a Singapore Major Market Player:
Manulife Investment Management 150
31 Interview with a Singapore Major Market Player: SGX RegCo 153
Appendix
Methodology157
Methodology 158
FINDINGS
Our main findings include the following points:
1. There is no “one best way” to do ESG integration and no “silver bullet” to ESG
integration.
2. Governance is the ESG factor most investors are integrating into their process.
3. Environmental and social factors are gaining acceptance, but from a low base.
4. ESG integration is further along in the equity world than in fixed income.
5. Portfolio managers and analysts are more frequently integrating ESG into the
investment process but are rarely adjusting their models based on ESG data.
6. The main drivers of ESG integration are risk management and client demand.
7. The main barriers to ESG integration are a limited understanding of ESG issues
and a lack of comparable ESG data.
8. Investors acknowledge that ESG data has come a long way, but advances in quality
and comparability of data still have a long way to go.
9. It would be helpful for issuers and investors to agree upon a single ESG report-
ing standard that could streamline the data-collection process and produce more
quality data.
10. Many workshop participants were concerned that ESG mutual funds and exchange
traded funds (ETFs) offered to investors may be driven by marketing decisions
and may not be true ESG investment products.
India Russia
Singapore Switzerland
United Kingdom
Abbreviations: AMER, Americas; APAC, Asia Pacific; EMEA, Europe, Middle East, and Africa.
Australia
1. Australian practitioners perform advanced qualitative and quantitative analysis
of ESG factors to add insights at multiple levels: company, industry, and overall
market. Unlike most markets, the number of practitioners who adjust their secu-
rity valuations is only slightly lower than the number of practitioners who directly
overlay qualitative ESG factors into their portfolio construction decisions.
2 WWW.CFAINSTITUTE.ORG
Executive Summary
2. Corporate governance is far and away the ESG factor most integrated by investors
in the investment process, although survey participants expect environmental and
social issues to become much more integrated in the investment process in the
near future.
3. Risk management and client demand are the main factors driving ESG inte-
gration in Australia, with fiduciary responsibility seen as a main factor among
fixed-income investors. A lack of understanding of ESG issues and a lack of com-
pany culture around ESG integration are the main barriers in Australia to ESG
integration.
China
1. China has seen a significant uptake of ESG investing in the last couple of years.
Like other emerging markets, a major driver has been ESG integration demand
from international investors. Unlike some other markets, regulation has also been
a major driver.
2. The evolution of ESG investing in Chinese investment firms tends to start with
developing ESG products first, such as a green thematic mutual fund. However, it
can quickly advance to incorporating ESG terms into the investment philosophy
and ESG factors into investment research, processes, and decisions.
3. A limited understanding of ESG issues, a lack of company culture around ESG
investing, and lack of comparable historical ESG data are seen as the main barri-
ers to ESG integration. The inclusion of the China A-share market in the major
indices has improved the data coverage and encouraged local companies to
develop databases on ESG information.
India
1. The buy-in for ESG investing in India has been slow over the last few years.
While there are some early movers, most investment managers are not witness-
ing demand for ESG products or asset owners with policies that explicitly ask for
ESG practices to be incorporated in an investment manager’s process. Where
there is demand, it is predominantly from multilateral institutions and European
investors.
2. About two-thirds of financial professionals in India feel that corporate governance
issues “often” or “always” impact share prices compared to one-third for environ-
mental and social issues. In five years’ time, however, well over half of those sur-
veyed feel that environmental issues will “often” or “always” impact share prices and
bond yields.
3. The main barriers to equity and fixed-income integration in India are a limited
understanding of ESG issues, a lack of company culture around ESG integration
and a lack of client demand. While the awareness is increasing due to foreign
investors, there isn’t the same level of interest from local investors. ESG investing
is not receiving attention from the larger institutional investors in the Indian mar-
ket, which has made a difference in other markets.
Japan
1. There was a recognition among workshop participants that ESG integration is just
beginning to happen in Japan. Equity practitioners integrate ESG factors more
frequently than fixed-income practitioners do. For both sets of practitioners, inte-
grating ESG factors at the portfolio level is not yet commonly practiced.
2. Corporate governance is the ESG factor most incorporated into share prices and
bond yields by investors by a factor of 2 to 1.
3. Fiduciary duty is a driver of ESG integration in the equity space, only behind risk
management, while client demand for ESG integration mostly drives adoption in
fixed income. Lack of understanding of ESG, limited data, and concerns about
returns are barriers to ESG integration in Japan.
Singapore
1. There is increasingly more ESG integration in Singapore and Asia, and ESG issues
are more frequently impacting prices. Asian economies are maturing. Asian coun-
tries are thinking more about the long term and not just about putting food on
the table today. Asian countries are at the beginning of the journey but very eager
to learn quickly about ESG.
4 WWW.CFAINSTITUTE.ORG
Executive Summary
2. Survey participants feel that environmental and social factors barely influence
bond yields today but feel that those numbers will impact bond yields a great deal
in five years’ time.
3. A lack of comparable and historical data is the top barrier to incorporating ESG
factors in equity investments in Singapore. The workshop participants were posi-
tive about data coverage and quality improving in the future, including for small
companies, but there are still large gaps in the data that need to be filled.
■ There is no single agreed-upon definition of ESG or best practice for ESG integra-
tion. Therefore, integrating ESG analysis into the investment process should be done
in a manner that best fits each individual firm, its resources, and its clients. However,
a set of common best practices is beginning to emerge as professional investors
increasingly integrate ESG factors into their analyses and investment processes.
■ ESG integration looks at risks and opportunities revealed by the analysis of envi-
ronmental (E), social (S), and/or governance (G) issues that are material for a
company or market. It is often more complex than negative screening, though
a not-insignificant minority of those we spoke to still think of ESG investing as
simply a negative screen.
■ One of the main reasons firms undertake ESG analysis is to assess risk. However,
the results of our survey and workshops show that few investors are looking at ESG
analysis as a means of uncovering investing opportunities. Investors who can spot
companies that are improving their E, S, or G profiles—before the larger mar-
ket does—may be rewarded. Numerous examples are available of academic1 and
practitioner research that support the benefit of the inclusion of ESG analysis in
traditional financial analysis.
■ Investors should focus on ESG analysis, not ESG investing. ESG investing is often
used as a marketing slogan, whereas ESG analysis is a fundamental part of invest-
ment analysis and requires a disciplined and tangible approach to be fully inte-
grated into the investment process. In the long term, we expect the term “ESG
investing” will fade away as ESG analysis becomes more accepted as simply a part
of investment analysis.
■ ESG integration is consistent with a manager’s fiduciary duty to consider all rel-
evant information and material risks in investment analysis and decision making.
Some confusion arises at times when people assume ESG integration is only a
negative screen in the investment process that limits one’s investment universe.
Most practitioners would agree (as do we) that ESG integration includes a more
thorough application of traditional financial analysis.
1
Gunnar Friede, Timo Busch, and Alexander Bassen, ESG and Financial Performance: Aggregated Evidence
from More Than 2000 Empirical Studies, Journal of Sustainable Finance & Investment 5 (December 15, 2015):
210–233. DOI:10.1080/20430795.2015.1118917
6 WWW.CFAINSTITUTE.ORG
Considerations for Those Integrating ESG into the Investment Process
■ Buyers should beware of products that claim to be ESG investment products. Many
products marketed as ESG compliant or sustainable will define ESG differently
and make different assumptions about what investments to include and what not
to include. Investors need to do research when investing in anything called “ESG”
or “sustainable,” to ensure they agree with the methodology behind those desig-
nations (see the companion report, Guidance and Case Studies for ESG Integration:
Equities and Fixed Income).
■ To date, one of the main drivers of ESG integration globally has been client
demand, largely from institutional investors. Investors who want their asset man-
agers to integrate ESG data into the investment process will have to demand it;
when they do, asset managers are likely to respond. Likewise, investors who want
better material ESG data from companies should also demand it.
■ Asset owners and asset managers should strive to do a better job of educating each
other about how and why they integrate ESG data in the investment process. Clear
communication by investors to their clients about ESG integration could do much to
reduce the confusion and misperceptions surrounding what ESG integration involves.
■ Investors justifiably remain concerned with the quality, accuracy, and comparability
of the ESG data they are using in their analyses. We are in the early days of ESG inte-
gration, and few standards and little verification are available with regard to ESG
disclosures and ESG data. Thus, investors need to understand how robust, accurate,
and comparable the data they are using are and adjust their analyses accordingly. In
addition, investors and companies need to work together to agree on the reporting
of material ESG issues only and to promote the standardization of ESG data.
1. Australia
2. China
3. Hong Kong SAR, China
4. India
5. Japan
6. Singapore
The first section, “Regional Analysis: APAC,” provides an overview of our survey results
for the entire region (APAC). The market sections that follow each have some or all of the
following subsections, which analyze the current and future impact of ESG factors on capi-
tal markets and investment practices, drivers of and barriers to ESG integration, trends
in ESG company data, and investment practices of local practitioners (see “Appendix:
Methodology”):
8 WWW.CFAINSTITUTE.ORG
How to Use This Report
IS
YS
NAL RI
A ESG and financial risk SK
O
RI exposures and limits M
ENA AN
AG
SC Portfolio scenario
EM
analysis
EN
SE
CU
T
Forecasted RI
Internal credit TY
assessment financials & ratios VA
RESEARCH
LU
AT
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N—
Relative
ESG-integrated Centralized Value-at-risk
FIX
Forecasted ranking
research research analysis
financial
ED
ratios note dashboard
INC
Materiality ESG agenda at
OME
framework (committee)
meetings
Individual/
collaborative/ Relative
Tactical asset SWOT analysis
ESG policy value
allocation Valuation INTEGRATION engagement analysis/
spread
S E CU R I T
multiples
analysis
Internal ESG Voting
research
Y VA
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Duration
ET A
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Red-flag
analysis
indicators
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CO
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Portfolio weightings
TFO
POR
10 WWW.CFAINSTITUTE.ORG
The ESG Integration Framework
The ESG Integration Framework is not meant to illustrate the perfect ESG-integrated
investment process. Rather, the ESG Integration Framework is meant to be a reference
so that practitioners can analyze their peers’ ESG integration techniques and identify
those techniques that are suitable for their own firms. We believe that this will be a useful
resource and reference as you develop your ESG-integrated investment process over time.
As every firm is unique, the ESG integration techniques of one firm are not necessarily the
right techniques for all firms.
We recommend you refer to the ESG Integration Framework as you read the “Investment
Practices of Local Practitioners” subsections of each regional report and the companion to
this report, Guidance and Case Studies for ESG Integration: Equities and Fixed Income.
Active Ownership
■ Voting: This structured process captures all voting rights and applies a rigorous
analysis to management and shareholder resolutions before casting votes. As well
as being used for voting, this process can also be employed to submit resolutions
on which other shareholders may vote.
■ Individual/collaborative/policy engagement: Corporate engagement captures
any interactions between the investor and current or potential investee compa-
nies on ESG issues and relevant strategies, with the goal of improving (or iden-
tifying the need to influence) ESG practices and/or improving ESG disclosure.
Public policy engagement captures interactions between the investor and poli-
cymaker, regulator, or stakeholder group (e.g., an industry association or stan-
dard setter) on financial policy, regulation, and industry codes, with the goal of
clarifying ESG requirements, including ESG integration, stewardship, and dis-
closure, and on ESG-specific topics, such as government commitments to action
on climate change. Both corporate engagements and public policy engagements
involve a structured process that includes dialogue and continuous monitoring
of progress. These interactions might be conducted individually or jointly with
other investors.
12 WWW.CFAINSTITUTE.ORG
The ESG Integration Framework
Portfolio Construction
■ ESG profile (versus benchmark): The ESG profile of portfolios is examined
for securities with high ESG risks and assessed relative to the ESG profile of a
benchmark.
■ Portfolio weightings: Adjustments are made to weightings of companies, sectors,
countries, and/or currency in a portfolio to mitigate ESG risk exposures and avoid
breaching ESG risk limits and other risk limits.
■ Portfolio scenario analysis: Different ESG scenarios are run to assess the impact
of ESG factors on portfolio risk and return.
Asset Allocation
■ Strategic asset allocation: Strategic asset allocation (SAA) strategies factor in ESG
objectives and analysis to progressively mitigate the ESG risks and enhance finan-
cial performance.
■ Tactical asset allocation: Tactical asset allocation (TAA) strategies factor in ESG
objectives and analysis to mitigate short-term ESG risks.
■ Portfolio scenario analysis: Different ESG scenarios are run to assess the impact
of ESG factors on SAA strategies and TAA strategies.
14 WWW.CFAINSTITUTE.ORG
CASE STUDY TABLE
We collected more than 30 case studies to demonstrate many of the techniques found in
the ESG Integration Framework. The case studies were written by leading practitioners
across 12 markets in the Americas, EMEA, and APAC regions.
The case study table provided here will help you navigate the case studies found in the
best-practice report, Guidance and Case Studies for ESG Integration: Equities and Fixed Income.
Hong Kong SAR, The Goldman Sachs Group, Inc. Semiconductor Equity
China
(Continued)
16 WWW.CFAINSTITUTE.ORG
SECTION 1
REGIONAL ANALYSIS:
ASIA PACIFIC
REGIONAL ANALYSIS: ASIA PACIFIC
IMPACT ON PRICES AND YIELDS
When asked how often ESG issues affect share prices, respondents answered “often” or
“always” 64% of the time for governance issues, 30% of the time for social issues and 24%
of the time for environmental and issues (see Figure 2). This result was similar to what
we found in our workshops with practitioners, where we found corporate governance
was most often integrated into the investment process. In most markets, incorporating
environmental and social factors in the investment process was in its early stages. This
pattern was similar when reflecting on how often ESG issues affect corporate bonds and
sovereign debt, with governance the factor most often incorporated in the investment
process.
We also wanted to see whether survey respondents in APAC believed that ESG data
would become more important in the future or stay relatively the same. We asked them
how often they expected ESG issues to affect share prices and bond yields/spreads in 2022.
We found that respondents expected ESG issues to become more influential in the coming
years—especially for corporate and sovereign debt (Table 1). While respondents believe
that social issues more frequently impacted share prices and bond prices in 2017, they
TABLE 1: THE IMPACT OF ESG ISSUES IN 2017 AND THE EXPECTED IMPACT IN FIVE YEARS’
TIME (2022) ON SHARE PRICES, CORPORATE BOND YIELDS/SPREADS, AND
SOVEREIGN DEBT YIELDS
AFFECTED IN 2017 WILL AFFECT IN 2022
ESG ISSUES IMPACT ON SHARE PRICES
Governance 64% 73%
Environmental 24% 59%
Social 30% 55%
ESG ISSUES IMPACT ON CORPORATE BOND YIELDS/SPREADS
Governance 43% 60%
Environmental 15% 48%
Social 17% 42%
ESG ISSUES IMPACT ON SOVEREIGN DEBT YIELDS
Governance 32% 49%
Environmental 14% 41%
Social 19% 41%
Note: Percentages represent respondents who answered “often” or “always.”
18 WWW.CFAINSTITUTE.ORG
Regional Analysis: Asia Pacific
expect environmental issues will more frequently impact share prices and corporate bond
prices in 2022.
TABLE 2: THE IMPACT OF ESG RISKS AND OPPORTUNITIES ON SHARE PRICES, CORPORATE
BOND YIELDS/SPREADS, AND SOVEREIGN DEBT YIELDS
AFFECT “OFTEN” OR “ALWAYS”
HOW OFTEN DO ESG RISKS AND OPPORTUNITIES AFFECT SHARE PRICES?
Environmental risks 27%
Environmental opportunities 17%
Social risks 30%
Social opportunities 21%
Governance risks 64%
Governance opportunities 38%
HOW OFTEN DO ESG RISKS AND OPPORTUNITIES AFFECT CORPORATE BOND YIELDS/SPREADS?
Environmental risks 18%
Environmental opportunities 14%
Social risks 22%
Social opportunities 16%
Governance risks 39%
Governance opportunities 26%
HOW OFTEN DO ESG RISKS AND OPPORTUNITIES AFFECT SOVEREIGN DEBT YIELDS?
Environmental risks 18%
Environmental opportunities 13%
Social risks 21%
Social opportunities 16%
Governance risks 34%
Governance opportunities 26%
20 WWW.CFAINSTITUTE.ORG
Regional Analysis: Asia Pacific
TABLE 4: THE IMPACT OF ESG ISSUES IN 2017 AND THE EXPECTED IMPACT IN FIVE YEARS’
TIME (2022) ON SHARE PRICES, CORPORATE BOND YIELDS/SPREADS, AND
SOVEREIGN DEBT YIELDS
AFFECTED IN 2017 WILL AFFECT IN 2022
ESG ISSUES IMPACT ON SHARE PRICES
Governance 68% 71%
Environmental 35% 61%
Social 32% 45%
ESG ISSUES IMPACT ON CORPORATE BOND YIELDS/SPREADS
Governance 44% 61%
Environmental 11% 56%
Social 0% 39%
ESG ISSUES IMPACT ON SOVEREIGN DEBT YIELDS
Governance 33% 50%
Environmental 0% 39%
Social 11% 28%
Note: Percentages represent respondents who answered “often” or “always.”
24 WWW.CFAINSTITUTE.ORG
The Impact of ESG Factors on Capital Markets and Investment Practices: Survey Data
TABLE 5: THE IMPACT OF ESG RISKS AND OPPORTUNITIES ON SHARE PRICES, CORPORATE
BOND YIELDS/SPREADS, AND SOVEREIGN DEBT YIELDS
AFFECT “OFTEN” OR “ALWAYS”
HOW OFTEN DO ESG RISKS AND OPPORTUNITIES AFFECT SHARE PRICES?
Environmental risks 26%
Environmental opportunities 13%
Social risks 32%
Social opportunities 16%
Governance risks 61%
Governance opportunities 35%
HOW OFTEN DO ESG RISKS AND OPPORTUNITIES AFFECT CORPORATE
BOND YIELDS/SPREADS?
Environmental risks 6%
Environmental opportunities 6%
Social risks 6%
Social opportunities 0%
Governance risks 33%
Governance opportunities 17%
HOW OFTEN DO ESG RISKS AND OPPORTUNITIES AFFECT SOVEREIGN DEBT YIELDS?
Environmental risks 0%
Environmental opportunities 0%
Social risks 6%
Social opportunities 6%
Governance risks 33%
Governance opportunities 22%
26 WWW.CFAINSTITUTE.ORG
DRIVERS OF AND BARRIERS TO ESG
INTEGRATION: SURVEY DATA AND
WORKSHOP FEEDBACK
CFA Institute and PRI thank Dimensional Fund Advisors and MSCI for
their help in organizing our ESG Integration workshops in Australia. With
their assistance, we were able to work with investors and analysts to better
understand the current state of ESG integration.
labelled as “ESG” or “sustainability.” The ESG products may screen out some companies,
but they aren’t applying ESG integration techniques.
■ An investor said that they started to integrate into valuation models a couple of
years ago and have run funds with screening policy for quite some time.
■ Another investor includes ESG research in investment-grade research as ESG
factors affecting credit risk. This investor only utilizes ESG integration, not
screening out sectors and companies. In the past, ESG used to be a box-ticking
exercise, but now ESG research is formalized into the process.
■ An investor said that ESG is fully integrated into their investment process, which
includes creating ESG scores. This investor is adjusting valuations because
governance is critical, ESG is correlated with quality, and ESG is impacting cash
flows. For example, environmental penalties and fines are having a negative
impact on cash flows of companies. The “holy grail” is to add alpha.
■ An equity investor embeds ESG systematically in the template/research notes/
dashboards with ESG scores displayed with traditional investment metrics. This
investor also adjusts valuations: governance issues have a greater focus than envi-
ronmental and social issues, with less transparent companies having a lower valua-
tion; they look at growth opportunities such as China with its strong environmental
initiatives and environmental stocks. If companies are exposed to environmental
risks and have a history of controversies, their margins will be marked down, and
if the ESG performance of a company is improving, it might lead to an increase in
its valuation.
■ An index manager stated that in their non-
An equity investor embeds ESG
client mandates (ETFs) there is zero ESG
systematically in the template/
integration and not many products based
research notes/dashboards
on ESG indices. For client mandates (segre-
with ESG scores displayed with
gated accounts), this investor has products
traditional investment metrics.
that exclude tobacco, other sectors, and/or
This investor also adjusts
companies that manufacture or associate
valuations.
with cluster bombs.
28 WWW.CFAINSTITUTE.ORG
Drivers of and Barriers to ESG Integration: Survey Data and Workshop Feedback
ESG is more easily quantifiable in the real asset space, according to one work-
shop participant. Properties can demand higher rents for more sustainable buildings.
Emission reductions through retrofits are measurable. Solar panels are measurable.
New buildings require environmental permits and borrowers are inclined to adhere to
environmental laws.
EDUCATION
Many participants said education is needed for investors. Clients have different awareness
and understanding of ESG integration and the issues.
Also, there are different definitions for ESG investing and different interpretations
of the ESG practices, which has muddied the playing field. Ethical screening is predomi-
nantly what investors believe to be ESG investing.
MATERIALITY
Workshop participants asked many questions about materiality. Some examples are: Which
issues are material? How does one quantify the externalities? How does ESG affect company
performance? Is it affecting the investors’ performance or company performance? How
much value are you going to add with ESG integration?
Another issue that participants raised is that mate- There were also lots of ques-
riality is hard to define. For example: Is ESG reflected tions from workshop par-
in financials and valuations? By how much should one ticipants around materiality.
adjust the discount rate: 1 percentage point, 2 percent- Which issues are material?
age points, 10 percentage points? Would a difference How to quantify the exter-
of 10% between the valuation and the market price of nalities? How does ESG affect
an issuer be sufficient for an ESG issue(s) to trigger an company performance?
investment decision?
Also, there is a lack of clarity of which E, S, and
G issues are important to investors and how they materialize. Lack of clarity could have
caused the low numbers on governance in the survey.
CONSTRAINTS
Participants discussed the constraints to implementing ESG integration.
Integrating ESG issues requires assessing the ESG issues against the investment
period. The materiality of ESG issues depends on time frame, especially in fixed income,
which can mean one invests a short-duration issuance from an issuer but not a long-dura-
tion issuance.
The issue of constraints due to benchmarks was mentioned by several participants.
Investors are often reluctant to apply ESG integration techniques due to the risk of causing
large tracking errors that breaches risk limits. Australian-based indices are concentrated
on certain sectors, which means certain funds that apply exclusionary screens can deviate
hugely from the benchmarks. One participant commented that it would help if we bench-
mark against ESG benchmarks.
Sell-side is not doing much to integrate ESG. There is a need for more fundamental
investment research by the sell-side, as investors need it to integrate ESG issues and also
because it sends a message to all investors—ESG investors and mainstream investors—that
ESG issues are important and can improve company performance.
30 WWW.CFAINSTITUTE.ORG
Drivers of and Barriers to ESG Integration: Survey Data and Workshop Feedback
Drivers
As in most other markets, risk management and client demand are driving ESG integra-
tion in Australia.
There is lots of demand, but not all clients are As in most other markets,
asking for it, and not many are sophisticated. Often, risk management and cli-
clients will ask managers if they are a PRI signatory, ent demand are driving ESG
and therefore it is a PRI tick-box. There is strong integration in Australia.
demand for ESG in equities from asset owners not
for ESG in fixed income. There is a range of clients
from full-blown ESG supporters to skeptics; it is possible to cater to all through different
products.
A participant said that ESG integration can be driven by client demand, but they
haven’t been given a green mandate yet. One participant noted that ESG would go to the
top of the list if it impacted performance. An investor said that they look at upside poten-
tial and downside risk.
Barriers
The top two barriers to ESG integration in Australia are a lack of understanding of ESG
issues and a lack of company culture that is conducive to integrating ESG into the invest-
ment process.
Culture is a low driver but a big barrier, as is senior management buy-in. There are
cultural differences between Europe and Australia; for instance, Europe believes in cli-
mate change, whereas climate change is still under dispute in Australia.
One workshop participant noted that while client demand is driving integration some-
what, that demand is relatively low. One participant noted that institutional clients are not
clamoring to integrate ESG.
32 WWW.CFAINSTITUTE.ORG
TRENDS IN ESG COMPANY DATA
We partnered with Bloomberg to analyze the transparency of ESG disclosure in each market for compa-
nies with a market cap of above USD 1 billion. The information in these figures comes from the analy-
sis of Bloomberg’s ESG disclosure scores, which are based on publicly available data; they are a score
of how companies report on ESG, not necessarily how they perform. The score is based on company
disclosures on different environmental, social, or governance disclosure points. Each type of disclosure
is scored from 0 to 100, and then aggregated to a single environmental, social, or governance score.
These are again aggregated to a combined ESG score. We have only included scores for sectors with
more than seven listed companies. (For more information, see “Appendix: Methodology.”)
Figure 5 shows the number of companies domiciled in Australia across sectors, which
report and do not report on ESG factors. The market is fairly small with 135 primary list-
ings in total. However, of those 135 companies, 133 report on ESG factors. All sectors
40
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re
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d
un
er
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In
Te
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er
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um
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Co
except the consumer discretionary sector have 100% coverage of ESG reporting, and only
2 out of 17 companies in consumer discretionary do not report. As with the other markets,
the governance score coverage equals the coverage of the overall ESG disclosure score, i.e.,
100% for all sectors except consumer discretionary.
Social disclosure is also well represented across the market. In the communications,
energy, health care, industrials, materials, and utilities sectors, 100% of companies report
on social factors. For the consumer staples, financials, and technology sectors, one com-
pany in each sector reports on governance but not on social factors. In total, this means
that 132 of the 135 companies reporting on ESG factors report on social factors.
Environmental disclosure is not as common as governance and social disclosure in
Australia. The utilities sector is the only sector where all listed companies disclose, whereas
only one company in each of the consumer staples, energy, industrials, and materials sec-
tors does not disclose on environmental factors. It looks different in the communications
and technology sectors, where only half or just over half of the companies have environ-
mental disclosure (57.1% and 50%, respectively). Environmental disclosure covers just over
one-third of the consumer discretionary sector (68.4%), whereas the financial and health
care sectors have higher coverage at 84.6% and 80%, respectively.
Figure 6 shows the development of the median ESG disclosure score from 2011 to 2016
per sector in Australia. As mentioned above, the number of companies in the technology
and utilities sectors is too small, so they have been taken out of the analysis. Furthermore,
as the number of companies reporting on ESG factors in 2011 was below seven in the com-
munications, consumer staples, and energy sectors, their 2011 scores have been omitted.
Interestingly, the size of the sector seems to not be correlated to the median ESG disclo-
sure score. The highest-scoring sectors are industrials, materials, and consumer staples at
FIGURE 6: MEDIAN 2011 AND 2016 ESG DISCLOSURE SCORES FOR LISTED COMPANIES
DOMICILED IN AUSTRALIA
45 45
40 40 Median disclosure score
Number of companies
35 35
30 30
25 25
20 20
15 15
10 10
5 5
0 0
ns
gy
ls
s
ry
g
l
tie
le
r
ia
ria
ia
na
ca
er
lo
tio
ap
nc
er
ili
no
En
tio
th
st
ca
St
Ut
at
na
du
al
ch
re
i
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un
er
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Fi
In
Te
sc
um
m
Di
m
ns
er
Co
Co
mu
ns
Co
Companies reporting on ESG factors ESG score (2016) ESG score (2011)
34 WWW.CFAINSTITUTE.ORG
Trends in ESG Company Data
39.46, 36.78, and 36.78, respectively, whereas the energy (31.12) and financials (30.99) sec-
tors are right behind them. The communications, consumer discretionary, and health care
industries are in the bottom with scores of 19.01, 21.90, and 24.38, respectively. This is in
line with the 2011 mean ESG disclosure scores, where the consumer discretionary (17.70)
and health care (17.77) sectors were the two lowest-scoring sectors, with communications
having been omitted. The materials had by far the highest 2011 median ESG disclosure
score at 32.85, whereas the financial and industrials sectors have seen large increases in
scores from 21.53 to 30.99 and 21.49 to 39.46, respectively.
Figure 7 shows the breakdown of the 2016 median environmental, social, and gover-
nance disclosure scores in Australia per sector (excluding technology and utilities). The
median social disclosure score has been excluded from consumer staples because not
enough companies disclosed information on social factors, as have the environmental dis-
closure scores for the communications, consumer staples, and energy sectors.
The trend among the scores across all sectors is that the median governance disclo-
sure score is the highest score, social is second, and the lowest score is the median environ-
mental disclosure score. However, the difference in scores varies a lot. Zooming in on the
governance disclosure scores, all sectors have scores at or above 48.21 (the communica-
tions, consumer discretionary, and health care sectors all have median governance dis-
closure scores of 48.21). The highest-scoring sectors are industrials and materials sectors
at 56.25 and 57.14, respectively, with consumer staples and financial taking third place at
53.57 for both sectors. This aligns well with the overall ESG disclosure scores, where con-
sumer staples, industrials, and materials had the highest median disclosure scores.
30 40
25
30
20
15 20
10
10
5
0 0
ns
ls
re
ls
gy
s
ry
rg
tie
le
ria
ia
na
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io
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ap
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at
En
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n
us
St
Ut
at
na
ic
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In
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um
m
Di
m
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Co
Co
um
ns
Co
Companies reporting on ESG factors Environmental score Social score Governance score
On the social side, there is much more variation in scores, with the lowest being the
communications sector at 24.56 and the highest being the energy sector having a median
social disclosure score of 45.31. These are also the two sectors with the largest and smallest
difference between social and governance score, respectively. The sectors with the second
and third highest median social disclosure scores are industrials and materials at 36.84 and
38.60, respectively, which aligns with the high governance and overall ESG disclosure scores.
This has also translated into the highest median environmental disclosure score
(32.56 and 24.03, respectively) of the five sectors with enough companies to be analyzed,
although the industrials sector score is quite a bit higher than materials. The financial sec-
tor is the sector with the third highest median environmental disclosure score at 23.26 and
the fourth highest median social disclosure score of 31.67. The consumer discretionary
and health care sectors both have very low median environmental disclosure scores at 7.29
and 12.79, respectively, which is not only low in absolute terms, but also much lower than
the governance and social disclosure scores for the two sectors (consumer discretionary,
48.21 and 29.82; health care, 48.21 and 28.07).
Overall, the coverage of ESG reporting in Australian listed companies is very high,
and almost all companies report on both governance and social factors. However, this does
not materialize in the amount of reporting under each theme, where all sectors see much
higher median disclosure scores for governance than social. In comparison to companies
who provide social and governance disclosures, fewer companies disclose on environmen-
tal factors. Those that do have lower environmental disclosure scores than their gover-
nance and social disclosure scores.
36 WWW.CFAINSTITUTE.ORG
INVESTMENT PRACTICES OF LOCAL
PRACTITIONERS: EQUITIES AND FIXED
INCOME
SUMMARY
■ Overall, equity practitioners are adjusting their valuation models/tools for mate-
rial ESG issues more frequently than fixed-income practitioners (Table 8). For
both equity and fixed-income practitioners, governance is the most frequently
integrated ESG factor (41% for equity, and 31% for fixed income). Both groups of
practitioners integrate social factors less frequently than environmental factors.
■ Figure 8 highlights the practices from the ESG Integration Framework that are
applied in Australia. Australian practitioners generally perform advanced quali-
tative and quantitative analysis of ESG factors to add insights at multiple levels:
company, industry, and overall market. Responsible engagement and voting are
prominently deployed to manage risk and communicate expectations to compa-
nies. Unlike most markets, the number of practitioners who adjust their security
valuations is only slightly lower than the number of practitioners who directly
overlay qualitative ESG factors into their portfolio construction decisions.
■ Fixed-income practitioners use ESG research primarily to enhance their assess-
ment of an issuer’s creditworthiness rather than its longer-term market value.
Corporate fixed-income practitioners integrate ESG factors slightly less fre-
quently than equity practitioners; however, some of their practices can be equally
advanced. Despite not having the same voting rights as equity shareholders,
bondholders consider they can still influence issuers through engagement when
needed. Sovereign debt practitioners are still developing their ESG integration
practices, which are currently focused on qualitative assessments of sovereign issu-
ers’ exposure to ESG risks and relying mostly on publicly reported data.
EQUITIES
Research
ESG analysis is seen by advanced practitioners to add insights at multiple levels: the spe-
cific company or asset, the industry sector in which it lies, and the market or economy in
which it operates.
IS
YS
AL RI
AN ESG and financial risk SK
O
RI exposures and limits M
ENA AN
AG
SC Portfolio scenario
EM
analysis
EN
SE
CU
T
Forecasted RI
Internal credit TY
assessment financials & ratios VA
RESEARCH
LU
AT
IO
N—
Relative
ESG-integrated Centralized Value-at-risk
FIX
Forecasted ranking
research research analysis
financial
ED
ratios note dashboard
INC
Materiality ESG agenda at
OME
framework (committee)
meetings
Individual/
collaborative/ Relative
Tactical asset SWOT analysis
ESG policy value
allocation Valuation INTEGRATION engagement analysis/
spread
S E CU R I T
multiples
analysis
Internal ESG Voting
research
Y VA
LUA
ASS
Duration
ET A
IO N
Red-flag
analysis
indicators
—
LLO
Valuation-model
EQ
variables
UI
TI
benchmark)
TIO
ES
N
U CT
S TR
N
CO
L IO
Portfolio weightings
TFO
POR
■ At a macro level, ESG analysis may feed into domestic and international invest-
ment insights and form part of regular meetings with investment teams to develop
conviction and idea generation.
■ Detailed sector reports may include analysis of ESG growth and risk factors, such
as the impact of new technologies, consumer preferences, resource constraints,
new regulation, or systemic issues such as climate change.
38 WWW.CFAINSTITUTE.ORG
Investment Practices of Local Practitioners: Equities and Fixed Income
■ At a stock level, ESG factors may directly impact a company’s earnings/costs. The
way a company manages key ESG risks can also be used as a proxy for manage-
ment quality. ESG-integrated SWOT analysis may be conducted, and aggregated
scores combining industry sustainability with company ESG performance may be
monitored to help track risk and growth trajectories of investments and identify
new investment opportunities. Practitioners note that ESG factors can affect a
company’s intangible assets such as its reputation and relationships with key stake-
holders, and through them, the company’s value and performance. According
to practitioner estimates, up to 75% of a typical company’s market value may be
derived from such intangible assets.
forecasting long-term investment performance. The ESG research may then be shared
across all investment teams, who consider it when developing company value (or target
price) and buy/sell/hold decisions or overweight/underweight/neutral decisions.
ESG items are also prominently discussed at (committee) meetings where material
issues are discussed by the portfolio management team as part of the investment decision
making process.
Practitioners will engage with company boards and operational management to
understand how those risks are managed, with larger universal investors also confidently
communicating their views and expectations to companies. Some practitioners engage
in ESG issues via associations such as Regnan Governance Research & Engagement,
the Responsible Investment Association Australasia (RIAA), and the Investor Group on
Climate Change.
Advanced equity practitioners may also actively consider and vote on most or all reso-
lutions put up by companies owned in the portfolio. Good practice includes having a for-
mal proxy voting policy, maintaining a record of all votes cast, and reporting on them.
Security valuation
Unlike the case in most markets, the number of practitioners who adjust their security
valuations is only slightly lower than the number of practitioners who directly overlay quali-
tative ESG assessments into their buy/sell/hold or overweight/underweight/neutral port-
folio construction decisions. The valuation method used depends on the nature of the
issue involved. Where ESG factors have been identified as material, they are incorporated
into company valuation, either explicitly through a company’s earnings and cashflow fore-
casts, or implicitly through the determination of the terminal value or discount rate valu-
ation adjustments.
More quantitative ESG factors are incorporated into valuation through an adjustment
to a dedicated line item or through an adjustment to the margin assumption. Capacity and
costs associated with compliance to evolving ESG standards are essential considerations
in assessing the future margins of a business. Similarly, changing consumer preferences
and expectations as well as regulatory/policy shifts determine the sales performance of a
business and thus are required considerations for estimating revenue forecasts. Specific
pricing may be used where it is available or a best estimate where it is not available, e.g.,
actuarial assessment of asbestos liabilities or an assessment carbon pricing where no local
market exists from global data.
Examples of issues explicitly factored into a company’s earnings or cashflow include:
■ revenue (lost volume from fatalities, license to operate, lost contracts, product
recalls, and reduced/ increased demand),
■ operating costs (energy costs, fuel efficiency, carbon costs, insurance, resilience
planning, fines, regulatory compliance, employee engagement, industrial action,
supply chain investment, R&D, local stakeholder engagement, and IT data
security),
40 WWW.CFAINSTITUTE.ORG
Investment Practices of Local Practitioners: Equities and Fixed Income
■ capital costs (to meet regulatory emissions requirements and resilience and adap-
tation investment), and
■ balance sheet accounts (litigation liabilities, asset write downs).
For less quantifiable ESG factors, practitioners may adjust the terminal value or discount
rate, with the magnitude of the adjustment determined by factors such as the probability of
the event and the materiality of the associated impact. In the case of a company with adverse
social impact or poor corporate governance, practitioners may increase the discount rate in
their discounted cashflow model or they may markdown their assessment of intrinsic value.
One example of how this is achieved is for an ESG score to be incorporated into the com-
pany beta and discount rate calculation, which feeds into the company valuation.
Portfolio construction
A significant proportion of practitioners are integrating ESG factors into their portfolio
construction processes. One approach used is to integrate ESG factors into their funda-
mental research or quality assessments which then influences portfolio weights. Another
approach is to directly use inputs such as conviction, valuation upside, ESG, and momen-
tum to produce a universe ranking, which then influences stock selection and weighting
decisions for the portfolio. Proprietary portfolio risk management tools (e.g., holdings,
carbon risk) may also be used to monitor exposure and adjust weights.
For some specific ESG strategies, the portfolio construction committee may use an
ESG overlay to tilt portfolios, including thematic tilts, toward selected ESG or carbon
exposures.
Asset allocation
While most practitioners do not factor in ESG at the asset allocation level, some recognize
that ESG issues could impact strategic asset allocation (SAA) and therefore assess their
materiality during regular reviews of SAA. For example, practitioners are monitoring the
effect of climate change, war, social unrest, gender discrimination, and other risks on real
GDP growth. Climate risk can impact the SAA for specific funds with a climate mandate.
In this instance, practitioners assess the potential impacts of climate change on the fund’s
portfolio and conduct a quantitative scenario analysis.
Risk management
Advanced practitioners may carry out periodic assessments of their portfolios for thematic
risks such as climate change. For some, ESG information may have an even larger impact
on a stock’s risk assessment compared to its valuation, which may be weighted at a certain
percentage of the total stock risk-adjusted valuation ranking.
FIXED INCOME
Research
ESG integration practices are less advanced for fixed-income practitioners compared with
their equity counterparties, for reasons including the following:
■ Bondholders typically do not have the voting rights or access to management that
institutional shareholders do;
■ Bonds can be issued by a variety of issuers, including unlisted entities or corporate
subsidiaries, or be project-specific rather than entity-specific, so that management
and accounting quality issues are often less transparent;
■ Variety of time frames (duration) for fixed-income investments and the horizon
over which some ESG issues might potentially play out may also be challenging to
determine;
■ Where companies or issuers are under financial stress, for example, bondholders
may take a more risk-averse position than an equity investor; and
■ Determining how ESG risks can be systematically priced into fixed-income instru-
ments such as fixed-income derivatives (synthetics) may also be challenging.
42 WWW.CFAINSTITUTE.ORG
Investment Practices of Local Practitioners: Equities and Fixed Income
relevant matters with banks and brokers. Others conduct independent and collaborative
engagement with policymakers on regional and international frameworks and on emerg-
ing carbon markets.
Sovereign debt practitioners most frequently use ESG research to identify, assess, and
monitor governance performance, which typically includes an assessment of politics and
political rights, corruption, and business environment. For democratic states, they may
explicitly assess the quality of their democracy, with some practitioners implementing
investment restrictions for undemocratic states.
Environmental and social issues analysis may encompass whether the government is
meeting specified standards for social and environmental performance, including specific
standards relating to militarism, nuclear energy and weapons, and human rights violations.
Some also consider investment restrictions put forward by national and supranational enti-
ties relevant to their universe including national foreign policy measures, United Nations
sanctions, and European investment restrictions, among others. Other frequently assessed
indicators deemed material to the overall risk/return characteristics of a sovereign issuer
include work, education, human welfare and economic equality issues, civil liberties, gen-
der inequality, water/land/air pollution, and biodiversity.
Most of the information required to analyze sovereign issuers is publicly available
through national statistics offices. However, many deem it important for analysts to spend
time on the ground and observe conditions firsthand to verify whether the statistics or the
news is giving the full picture. Market visits can include meetings with government offi-
cials, as well as simply observing the surrounding environment.
Security valuation
Although ESG factors can sometimes be directly forecasted in the issuer’s financials
through their impact on its ability to generate sustainable revenues or manage future
costs, most prominently they are integrated in security valuation within internal credit
assessments. Practitioners may assign to issuers internal credit scores that are materially
different from that assigned by the rating agencies.
Advanced practitioners also deploy ESG research to derive sharper insights into
bond pricingfor example, to inform a view as to whether ESG risks are likely to impact
an issuer’s spreads and whether this is adequately reflected in current market pricing.
For example, ESG analysis can impact the credit rating such that from a relative value
perspective, it looks expensive and practitioners thereby do not purchase or they sell
existing holdings.
Portfolio construction
Fixed income practitioners who deploy ESG-integrated internal credit scores often use
those when making buy/sell/hold decisions as well as to determine the position size for
the funds they manage. However, qualitative ESG research, such as ESG scorecards from
external providers, can also be used directly to signal potential underweight/overweight
securities. This is especially the case for severe ESG scores and events where other more
quantitative signals (based on a range of macro, market, and idiosyncratic factors) are also
indicating a potential sell/underweight decision for the portfolio. That is, ESG on its own
does not always signal a sell/underweight but in combination with the other quantitative
factors it can make the sell/underweight signal stronger or weaker.
Asset allocation
While most practitioners do not factor in ESG at the asset allocation level, some recognize
that ESG issues could impact strategic asset allocation (SAA) and therefore assess their
materiality during regular reviews of SAA. For example, practitioners are monitoring the
effect of climate change, war, social unrest, gender discrimination, and other risks on real
GDP growth.
Advanced practitioners report that they do not only adjust fixed-income duration
(exposure to real rates) in their macro strategies, but also determine allocation to infla-
tion, interest rate volatility, and the term structure of interest rates based in part on ESG
factors and sensitivity modelling of them. Other practitioners report to have avoided assets
that have high ESG risks altogether, such as correctional facilities, as well as geographies
that may have high-risk factors like bribery and corruption.
44 WWW.CFAINSTITUTE.ORG
INTERVIEW WITH AN AUSTRALIAN MAJOR
MARKET PLAYER: AUSTRALIANSUPER
Interview with Andrew Gray, Director, ESG and Stewardship at AustralianSuper, on the subject of
ESG integration.
In your opinion, what is the state of ESG disclosures in Australia? How has this level of
disclosures changed over the last five years?
The quality and substance of ESG disclosures has increased in the last five years. Companies
are aware disclosure around ESG is necessary, and both investors and Australian companies
have embraced formal disclosure mechanisms like the Task Force on Climate-related Financial
Disclosures (TCFD) framework. Many companies have committed to reporting along these
lines, and we already see early adoption of the framework. We also see companies engaging on
implementing integrated reporting and using the Sustainable Development Goals as a report-
ing framework.
We are pleased with the increased level of information we are getting from disclo-
sures, but ESG reporting is still quite young relative to traditional financial reporting, and
more development is needed and inevitable.
Do you see any differences in the manner in which ESG integration is carried out in equi-
ties versus fixed income?
The nature of pricing of ESG issues in fixed income is materially different to equi-
ties. In equities, the share price of a company can fluctuate based on how ESG factors are
managed. ESG factors can come into play at any point in holding an equity investment,
and thus, a large suite of ESG factors can have an impact on the asset class. The financial
risk in fixed income, however, is more typically based upon default risk. Using this scope of
risk, a smaller subset of ESG factors are often prevalent for the investment.
Because of this, integration in equities has progressed at a faster pace than in fixed
income. We are encouraged, however, by new areas of opportunity in fixed-income mar-
kets such as green bonds and social impact bonds. We see these products as potentially
growing in prevalence in future as demand continues to rise, and they offer new avenues
for ESG integration in the asset class.
46 WWW.CFAINSTITUTE.ORG
Interview with an Australian Major Market Player: Australiansuper
Years of integration have proven this not to be the case, and this sentiment is fortunately
largely gone from financial markets and companies in Australia.
There was also the barrier of investor’s timeframe. Historically, many investors tended
to think quite short term, and ESG risks and opportunities didn’t seem relevant in shorter
timeframes. However, the investment climate has changed, particularly with the growth in
superannuation asset owners as noted previously, and investors are taking a longer-term
view on their portfolios. In this context, ESG integration is material and becomes part of
the process.
There was also the issue of the lack of information previously available on ESG issues
to be adequately able to assess and address ESG in the investment process. The push for
enhanced company disclosures on various issues, like the TCFD framework for climate
change which we fully support, has helped minimize the information gap. As a growing dis-
cipline, there is still a way to go in respect of ESG disclosures, but we are on the right track.
Finally, another important barrier to ESG integration is the understanding of the
investment process and the ability to integrate into already established investment pro-
cesses. ESG integration occurs best if it is embedded in the processes of the mainstream
analyst and portfolio manager and not sitting to one side. This requires a certain knowl-
edge of finance and financial drivers on behalf of the ESG practitioner. Therefore, the
training of investment professionals that combines traditional investment disciplines and
ESG knowledge is crucial to the development of ESG integration going forward.
How do you see ESG integration and disclosure evolving in Australia over the next five
years?
ESG integration and disclosure will continue to evolve, bolstered by new initiatives
and reporting frameworks. Recently, we have seen major support for the TCFD and the
Climate Action 100+ climate change engagement program, two initiatives we strongly sup-
port, and both have had a major impact on how companies are addressing climate change.
It is these sorts of platforms that will help integration and disclosure progress in future.
The nature of ESG is that there will always be new issues on the horizon. Governance
and traditional “E” risks and opportunities like climate change will continue to be a large
focus; however, we see future disclosures focusing on other ESG factors as well, particularly
“S” issues such as workforce issues, supply chain, and human rights. The “S” component is
increasingly a consideration for investors and will be a part of future disclosures.
TABLE 9: THE IMPACT OF ESG ISSUES IN 2017 AND THE EXPECTED IMPACT IN FIVE YEARS’
TIME (2022) ON SHARE PRICES, CORPORATE BOND YIELDS/SPREADS, AND
SOVEREIGN DEBT YIELDS
AFFECTED IN 2017 WILL AFFECT IN 2022
ESG ISSUES IMPACT ON SHARE PRICES
Governance 34% 61%
Environmental 16% 53%
Social 18% 47%
ESG ISSUES IMPACT ON CORPORATE BOND YIELDS/SPREADS
Governance 26% 57%
Environmental 13% 48%
Social 17% 43%
ESG ISSUES IMPACT ON SOVEREIGN DEBT YIELDS
Governance 39% 48%
Environmental 26% 35%
Social 22% 43%
Note: Percentages represent respondents who answered “often” or “always.”
50 WWW.CFAINSTITUTE.ORG
The Impact of ESG Factors on Capital Markets and Investment Practices: Survey Data
TABLE 10: THE IMPACT OF ESG RISKS AND OPPORTUNITIES ON SHARE PRICES, CORPORATE
BOND YIELDS/SPREADS, AND SOVEREIGN DEBT YIELDS
AFFECT “OFTEN” OR “ALWAYS”
HOW OFTEN DO ESG RISKS AND OPPORTUNITIES AFFECT SHARE PRICES?
Environmental risks 29%
Environmental opportunities 11%
Social risks 34%
Social opportunities 24%
Governance risks 53%
Governance opportunities 34%
HOW OFTEN DO ESG RISKS AND OPPORTUNITIES AFFECT CORPORATE
BOND YIELDS/SPREADS?
Environmental risks 17%
Environmental opportunities 13%
Social risks 30%
Social opportunities 26%
Governance risks 30%
Governance opportunities 26%
HOW OFTEN DO ESG RISKS AND OPPORTUNITIES AFFECT SOVEREIGN
DEBT YIELDS?
Environmental risks 17%
Environmental opportunities 17%
Social risks 30%
Social opportunities 26%
Governance risks 26%
Governance opportunities 30%
52 WWW.CFAINSTITUTE.ORG
DRIVERS OF AND BARRIERS TO ESG
INTEGRATION: SURVEY DATA AND
WORKSHOP FEEDBACK
CFA Institute and PRI thank The Asset Management
Association of China (AMAC) for supporting our ESG
Integration w orkshops in China. With their assistance, we
were able to work with investors and analysts to better understand the current state of ESG integration.
54 WWW.CFAINSTITUTE.ORG
Drivers of and Barriers to ESG Integration: Survey Data and Workshop Feedback
evaluation methodology for governance issues focuses on value creation. Environmental and
social risks are also considered to have more influence on share prices compared with bond
prices, which tend to be dominated by governance risks due to the focus on downside risk.
Although environmental and social issues are considered to have a lower influence
on market prices, participants believe that their materiality will increase. Several factors
were attributed to this view, including the development of government policies that force
companies to manage their environmental footprint
more sustainably. Regulators, security exchanges, and
associations are also developing rules and standards Although environmental and
for disclosures and product labelling. The top-down social issues are considered
pressures are increasingly turning what were once to have a lower influence on
exogenous costs to companies into environmental market prices, participants
risks managed by companies. In particular, the reg- believe that their materiality
ulator is enforcing tight regulation on companies’ will increase.
management of pollution and waste, focusing on
upstream companies such as materials and manufacturing firms.
As a consequence of the top-down pressures, more investors are analyzing the ESG per-
formance of companies. The surge of overseas client demand generated by the inclusion of
the China A-share market in major indices has also brought international scrutiny of Chinese
companies, especially by investors with ESG policy and practices. Companies are being asked
more questions on their ESG risk exposure by their shareholders and bondholders.
As is the case in other markets, there is variation in the level of ESG data between
different-sized companies. Large-cap companies have better ESG disclosure than small-
cap companies, and hence it is easier to analyze their ESG performance. This has been
attributed to the larger budget that they are allocating to personnel and systems that col-
lect and report on ESG issues. It is also attributed to the larger profile of the international
companies that brings with it closer scrutiny and higher reputational risks.
The inclusion of the China A-share market in the major indices has improved the
data coverage and encouraged local companies to develop databases on ESG information.
Some investors use both sources. Where there are gaps in data, investors are carrying out
their own ESG analysis. By developing proprietary ESG research frameworks/scorecards
and analysis, they are able to feed in third-party research and scores and apply their own
judgment into their fundamental analysis. Participants feel that due diligence and judg-
ment are necessary; over-reliance on third-party research and scores with limited under-
standing of the underlying methodology can bring its own risks.
56 WWW.CFAINSTITUTE.ORG
Drivers of and Barriers to ESG Integration: Survey Data and Workshop Feedback
EDUCATION IS ESSENTIAL
While there are leading Chinese investors that have fully integrated ESG factors and tools
into their research process and are engaging with companies, the market as a whole is not
so advanced. Most investors believe ESG investing is about doing good and investing in
companies that are good for society. Some think that when you integrate ESG factors, your
portfolio returns will be negatively affected. A participant stated that sell-side analysts do
not know what ESG is.
Several participants expressed difficulties with quantifying ESG factors. This is not
unusual in the developed markets. Not only does the coverage of ESG data create a barrier
to evaluating the investment risks and opportunities, the limited understanding of the
ESG integration techniques is preventing investors from factoring ESG information into
their valuation models. Although the majority of investors adjust their existing assessments
and models for ESG factors as they do with traditional factorsequally, investors are creat-
ing ESG research frameworks/scorecards and proprietary ESG scoressome participants
are asking for industry-standard methodology to quantify ESG factors.
The need for education is across the investment chain, from asset owners to invest-
ment managers to companies. In particular, there is confusion around the material ESG
issues. For example, an investor may consider climate
change the biggest risk to a steel company, while the The need for education is
company is more concerned by the regulatory risk across the investment chain,
related to air pollution. To compound the problem, from asset owners to invest-
another investor may engage with the same company ment managers to companies.
on health and safety. Such conflicting views can pre- In particular, there is confusion
vent investors and companies from managing their around the material ESG issues.
ESG risk exposure. Participants believe that an indus-
try-wide framework will resolve this problem and
boost the materiality of ESG issues.
Various market players are trying to increase the transparency around ESG invest-
ing. Security exchanges and associations are running conferences and workshops on ESG
investing. At the same time as discussing financial and ESG matters with companies, inves-
tors are providing training. These investors are also educating other investors. However,
there is a shortage of ESG professionals in China, which can limit the success of ESG
investing. A participant suggested that universities should offer courses and modules on
the topic.
58 WWW.CFAINSTITUTE.ORG
Drivers of and Barriers to ESG Integration: Survey Data and Workshop Feedback
Figure 11 shows the distribution of companies domiciled in China. Out of 1,924 pri-
mary listings, 872 (i.e., 45.32%) reported on ESG factors in 2016. When drilling down per
sector, there seems to be a negative correlation between the size of the sector and the per-
centage of companies reporting on ESG factors. For example, the three sectors with the
FIGURE 11: LISTED COMPANIES REPORTING AND NOT REPORTING ON ESG FACTORS IN CHINA
400
350
Number of companies
300
250
200
150
100
50
0
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60 WWW.CFAINSTITUTE.ORG
Trends in ESG Company Data
lowest coverage of ESG reporting, i.e., consumer discretionary (38.9%), industrials (41.2%),
and technology (31.9%), are among the four largest sectors (consumer discretionary [301
companies], industrials [359 companies], materials [262 companies], and technology [259
companies]). At the other end, the two smallest sectors, energy (80) and utilities (72) are
among the three sectors with the highest coverage with 51.3% and 58.3%, respectively.
Energy and utilities being among the sectors with highest coverage is in alignment with
the Japanese market, whereas surprisingly, the financial sector is the sector where the high-
est percentage of companies disclose on ESG factors, 66.82%, i.e., 141 of 211.
The coverage of governance disclosure equals the coverage of ESG overall. For social
disclosure, the coverage is almost the same. In the consumer staples and utilities sectors
all companies disclosing on ESG factors disclose on social factors, i.e., 48.7% and 58.3%,
respectively. In the energy, health care, and technology sectors, only one company that
reported on ESG factors did not report on social factors, which means a coverage rate of
50.0%, 39.0% and 31.5%, respectively. In the communications, industrials, and materials
sectors, 2 of 43, 148, and 133 companies reporting on ESG factors, respectively, did not
report on social factors. These numbers are very different for 2016 environmental report-
ing. Only 29.9% of companies in the consumer discretionary sector reported on environ-
mental factors, while 38.9% of them reported on governance factors. The difference is also
large in the communications (E, 23.9%; G, 46.7%), financial (E, 56.9%; G, 66.8%), and
technology (E, 24.9%; G, 31.9%) sectors. The utilities (E, 55.6%; G, 58.3%) and energy
(E, 46.3%; G, 51.3%) sectors are the two sectors in which most companies reported on
environmental factors as compared with governance factors.
Figure 12 shows the development of the median ESG disclosure score per sector
from 2011 to 2016. The 2016 median disclosure scores are similar across sectors with the
FIGURE 12: MEDIAN 2011 AND 2016 ESG DISCLOSURE SCORES FOR LISTED COMPANIES
DOMICILED IN CHINA
160 25
140
120
100 15
80
60 10
40
5
20
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Companies reporting on ESG factors ESG score (2016) ESG score (2011)
exception of communications, for which the score was 15.70. The rest of the sectors are
within a band from the lowest median ESG disclosure score being in consumer discretion-
ary (19.42) and the highest in utilities and energy (21.90). In 2011, the energy sector was
alone in the top with a median ESG disclosure score of 21.07. In all sectors, the median
ESG disclosure score has increased over the five years. The largest increase occurred in
the consumer staples sector, where the median ESG disclosure score went from 16.53 to
20.66 over the five years. The communications sector has also seen an increase (13.22 to
15.70), although it had, by far, the lowest median score in both years. The consumer discre-
tionary and technology sectors, which had the second and third lowest median disclosure
scores in 2016, had the third and fourth lowest in 2011 at 17.77 and 18.18, respectively. The
financials, health care, industrials, materials, and utilities sectors all had median ESG dis-
closure scores between 19.01 and 20.18 in 2011. Overall, the median ESG disclosure scores
were very similar across sectors.
Figure 13 shows the breakdown of the 2016 median environmental, social, and gov-
ernance disclosure scores across sectors. Looking at Figure 13, there is clearly a lot of
standardization across the three themes. In all sectors, the median disclosure score for
governance is the highest, social the second highest, and environmental the lowest. For
governance disclosure, the median score is between 42.86 in communications and 48.21
in financials and utilities, with the score being 44.64 in consumer discretionary, consumer
staples, health care, materials, and technology. For social disclosure, all sectors except
140
50
120
40
100
80 30
60
20
40
10
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0 0
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Companies reporting on ESG factors Environmental score Social score Governance score
62 WWW.CFAINSTITUTE.ORG
Trends in ESG Company Data
financials have a median disclosure score of 22.81. The financial sector has a slightly higher
median score of 24.17. In the bottom, the median environmental disclosure is also fairly
converged, with communications being the lowest scorer with a median disclosure score of
5.81. The rest have scores ranging from 8.53 in financials to 10.85 in energy. Four sectors
have a median environmental disclosure score of 9.30; these are consumer discretionary,
consumer staples, health care, and industrials.
Overall, the proportion of Chinese listed companies disclosing on ESG factors is
less than half. However, the companies that do report on ESG factors mostly report on
both social and governance factors and also, to a large extent, environmental factors. The
median ESG disclosure scores across sectors do not vary much, and this is the same for
median environmental, social, and governance disclosure scores broken up by theme. This
suggests standardization of disclosure. The median social scores were especially similar
across sectors.
64 WWW.CFAINSTITUTE.ORG
Roundtable interview on ESG integration in China
practical for China A-share market. The Chinese regulator is enforcing tight pollution reg-
ulation on companies, especially upstream ones. Any material issues related could become
an investment risk. Therefore, we pay more attention to pollution data and regulations.
66 WWW.CFAINSTITUTE.ORG
Roundtable interview on ESG integration in China
68 WWW.CFAINSTITUTE.ORG
Roundtable interview on ESG integration in China
manage their ESG risk exposures. The regulations will be able to facilitate ESG investing
in China in some way. If we take environmental regulations as an example, we could tell
that the regulations have not only driven the investment managers to take environmental
performance as a criterion but also pushed those listed companies to think about their
environmental impacts and disclose environmental data while running the business.
70 WWW.CFAINSTITUTE.ORG
Roundtable interview on ESG integration in China
and the regulators are also trying to shift the market toward this direction. These are good
signals for the future of ESG investing in China.
How do you integrate ESG data into your investment processes? Is it across different
asset classes, i.e., equity, fixed income, private equity, infrastructure, etc.?
We have developed a proprietary ESG research framework, which empathizes on
profiling the governance structures and performance of all companies, but also includes
72 WWW.CFAINSTITUTE.ORG
Interview with a Chinese Major Market Player: Harvest Fund Management
material environmental and social opportunities and risks based on industry characteris-
tics and investment relevance. By utilizing both external and internal ESG data, we pro-
file material ESG risks and opportunities of companies in our investment universe, which
our investment analysts and managers refer to when making their own judgement on how
these risks and opportunities materialize in different time frames.
Risk monitoring is another feature in our ESG investment process. Besides ESG port-
folio reporting, ESG-related controversies are also flagged in a timely manner for PMs to
manage event risks. We are also working with our postdoctoral research station to develop
internal artificial intelligence (AI), more specifically text mining capabilities, to actively
monitor ESG events and risks. We hope the output of this project could also be integrated
in our investment processes over time.
ESG integration is carried out across different asset classes at Harvest, mainly equity
and fixed income. But our approach in integrating ESG factors in equity and fixed income
varies. For example, due to the downside risk protection feature of credit analysis, gover-
nance is rather dominant compared to other ESG factors, and sometimes has veto power in
determining the investability of bonds. For equity, the relative materiality of E/S/G issues
varies by sector and sometimes by business growth cycle. So, the equity analysts or portfo-
lio managers may weigh less on governance (of course still meeting our level of comfort)
for a particular industry or company than on their environmental and social aspects. The
different investment time frame between equity and credit investment also may result in
different levels of materiality of ESG factors.
Though ESG assessment framework for credit and equity is largely the same, in par-
ticular for listed entities, some adaptations for credit are further required. For example,
the credit governance framework is slightly modified to address a focus on ownership,
transparency, and management quality. Credit ESG analysis is more challenging for small
issuers due to lack of disclosure, but our qualitative analysis addresses these challenges in
our framework.
Please give an example of a company where ESG factors impacted its investment deci-
sions (you do not need to name the company).
A direct example is that our investments require a minimum level of comfort for
governance over invested companies. Companies with high stock pledges and poor gover-
nance (e.g., ownership concerns) are excluded systematically in some of our strategies that
have a high governance threshold.
Active portfolio managers may interpret ESG risks and opportunities differently, and
make different investment decisions. Our ESG team discusses material ESG issues, with our
active portfolio managers on a daily basis, taking into account of the time horizon within
which these issues could materialize. We want to make sure material ESG angles and risks
are sufficiently acknowledged and debated by portfolio managers. For example, we have
developed a system automatically monitoring all environmental violations and fines issued
by relevant regulatory bodies on all listed companies, and material and severe cases are
alerted to portfolio managers and analysts in real time for risk prevention purposes.
We regularly discuss industry and company-level ESG issues with our relevant analysts
to highlight investment risks and opportunities. An example would be we highlighted to
our investment team the increasing compliance costs and reputational risks on account of
privacy and data security issues facing the internet software and services industry. We also
highlighted companies that face particularly high risks in this aspect, which have resulted
in analysts’ adjustment to their investment recommendation and thereafter the model
portfolio weights.
What techniques and tools have you used to promote ESG integration in your firm?
Our senior management endorses ESG integration across our investment functions.
Our ESG team first established a proprietary ESG research framework to address the lack
of corporate ESG disclosure and unique cultural and ESG regulatory developments in the
local market.
We believe in-depth ESG research and integration requires participation from indus-
try analysts and portfolio managers. On the security level, the ESG team works closely
with our investment analysts to provide in-depth ESG assessment and rating. On thematic
research, the ESG team is rather independent but takes the investment team’s view into
consideration, particularly when it comes to investment horizon and materiality. On the
portfolio level, we focus more on risk monitoring that highlights high-risk investments and
discuss improvement opportunities together with portfolio managers regularly.
Company engagement is another tool for us both to communicate our ESG demand
and sustainability standards to investee companies and to bring our portfolio managers to
the table for ESG discussion with company management. By engaging companies together
with our industry analysts and portfolio managers on ESG issues, our investment team
can get a vivid idea of a company’s long-term value creation vision and strategic planning
capabilities.
Incorporating ESG data into our online research platform is also part of our group-
level technology innovation and digitalization strategy at Harvest. The platform will make
ESG data and recommendations accessible to investment as a research tool and risk man-
agement tool, leveraging our ESG framework, data, and insights contributed by both our
internal research and external parties.
Building an ESG and responsible investing culture is an ongoing process. Our ESG
team also leads the internal education and awareness-raising efforts. Our regular aware-
ness-raising activities include annual ESG consultation with an internal investment team,
quarterly ESG strategy meetings with the investment committee, monthly ESG training
on ESG issues for the research team, weekly circulation of ESG newsletters featuring ESG
trends and research, etc.
How do you see ESG integration develop in China over the next five years?
From process to impact and vice versa: local asset managers to become more active
in developing ESG investment strategies and thematic funds for China A-share investors,
which will allow investors to channel their portfolios and make an impact to contribute to
sustainable development.
A more active role from owners of assets like insurance, sovereign wealth funds and
pension funds can be expected driven by policy and peer pressure; however, performance
of ESG investment strategies is still one of the main doubts and questions for local asset
owners considering wide adoption of ESG.
74 WWW.CFAINSTITUTE.ORG
Interview with a Chinese Major Market Player: Harvest Fund Management
More local large asset managers will follow suit to more formally integrate ESG fac-
tors into the investment process driven by client demand, policy development, and peer
pressure.
There seems to be great momentum behind ESG integration in China. What do you think
is necessary to accelerate this growth in ESG integration in China?
Leadership from large asset owners in China in promoting responsible investment.
With substantial power in the asset management industry in China, these big names are
expected to take a leading role and pass the requirements down to asset managers.
Clearer and implementable guidance from regulators. Guidance is needed that
focuses on integrating ESG factors in the investment process.
Data infrastructure. Regulators should work on improving ESG reporting by listed
companies; mandatory reporting framework and clear guidance are expected.
ESG human capital development. The shortage of the ESG talent supply is becoming a
bottleneck for China’s asset management industry to promote ESG investing. The govern-
ment and universities should nurture more ESG students and graduates, and investment
companies should offer better career development and incentives to attract and retain ESG
professionals.
76 WWW.CFAINSTITUTE.ORG
Interview with a Chinese Major Market Player: Asset Management Association of China
and further evaluate ESG risks and opportunities to ensure investment decision-mak-
ing is fully informed. During this phase, it may be necessary to consult external ESG
experts. After full consideration, an ESG action plan should be set. During investment
decision making, the action plan is executed and ESG factors are incorporated into
the process. Firms that have stewardship protocols should actively communicate ESG
expectations with companies in the portfolio, setting ESG expectations and plans for
achieving ESG goals. Finally, during postinvestment management, the implementation
of the ESG action plan is to be evaluated and recorded, and later disclosed as an ESG
report to investors.
As an example, CITIC PE sets different ESG focuses for different industries, sets fur-
ther ESG requirements for companies it invests in, implements plans for them to achieve
ESG goals, discloses annual ESG reports, and even goes so far as to ensure the ESG man-
agement system it established can persist after it exits.
The green bond market has developed a great deal in China in recent years. Can you tell
us a bit about the current state of green bonds in China?
Since the establishment of China’s Green Finance Committee (GFC) in 2015, China’s
green bonds market has developed rapidly. Climate Bonds Initiative data shows that,
regarding green bonds issuance around the world that adhere to international standards,
China’s global ranking in terms of green bonds issuance rose from 8th in 2015 (less than
1bn USD) to 1st in 2016 (23bn USD), 2nd in 2017 (22.5bn USD), and 2nd again in 2018
(30.9bn USD). According to GFC data and adjusted for exchange rate at the time of issue,
domestic issuance values were RMB 30.6bn in 2016 (approximately 30.6bn USD), RMB
304.5bn in 2017 (approximately 30.5bn USD), and RMB 322.3bn in 2018 (approximately
32.23bn); the difference is accounted for by the differing standards between domestic
standards and international standards for “green bonds.” From the significantly shrinking
difference, we observe that China’s domestic standards are rapidly converging on interna-
tional standards.
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Interview with a Chinese Major Market Player: Asset Management Association of China
The rapid expansion and improvement are the result of a national effort to raise
environmental awareness, which has permeated through the strategic decision-making
of the government and policies of regulators. It is easy to observe a top-down effort start-
ing from 2015’s Integrated Reform Plan for Promoting Ecological Progress published by the
CPC Central Committee and State Council. The government and regulators have quickly
established a regulatory framework guiding the development of the green bond market
and the green finance system as a whole, including but not limited to 2016’s Guidance on
Green Bond Issuance published by the National Development and Reform Commission,
Guidance on Building a Green Financial System issued jointly by seven ministries (including
the central bank), and Notice on the Pilot Program of Green Corporate Bonds by SSE, 2017’s
Guiding Opinions on the CSRC on Supporting the Development of Green Bonds by CSRC, as well
as the establishment of various green finance reform and innovation pilot zones.
The current state of the domestic green bonds market is one of increasing scale and
depth. According to GFC data, the volume of green corporate bonds and green debt
financing instruments has grown steadily, showing the increasing initiative taken by corpo-
rate borrowers in issuing green bonds. The total issuance of green Asset Based Securities
(ABS)/green Asset Based Notes (ABN), on the other hand, doubled between 2016 and
2017, but the pace of growth slowed down in 2018.
Both the number and diversity of issuers have steadily increased, with 2016, 2017, and
2018 having 31, 76, and 99 distinct green bond issuers, respectively, with the first A+-rated
issuer successfully issuing a green bond in 2018. In terms of the value of green bonds
issued, banks initially accounted for 78% of the value in 2016, but have dropped to and
remained at around 60% in 2017 and 2018. Cumulatively, banks account for approximately
two-thirds of the cumulative value of green bonds issued in China.
In particular, Industrial Bank of China is the most active issuer, having issued
RMB 112.6bn in green bonds since 2016. Bank of Communications, Shanghai Pudong
Development Bank, and Bank of Beijing have also each issued RMB 50bn in green bonds.
Investors are currently not as enthusiastic about green bonds as issuers. China’s regula-
tors have made green bonds easier to issue by opening designated channels and establishing
facilitated approval processes, resulting in easier issuance and therefore lower coupon rates.
Observing some overseas market practices like subsidized interest rates or tax credits for
investing in green bonds, there are no such policies to incentive investors in China. Therefore,
green bonds are relatively less attractive to investors as many green bond issuers have also
issued nongreen bonds, which have higher coupon rates. As any ESG issue that impacts the
issuer will equally affect its green bonds and nongreen bonds, investors have little incentive
to choose green bonds over regular bonds. This systematic lack of enthusiasm for investing in
green bonds can be observed from the relatively unchanged issuance amount each year. That
being said, investors know that green bonds and the green financial system is a focus of the
government and are cautiously observing the developments; it is expected that the govern-
ment will soon be implementing investor incentives to bolster the green bond market.
What’s next for ESG integration in China? Where do you see ESG integration in five
years?
We expect ESG integration to be relatively fast in China as the groundwork is currently
being set for it to take off. The top-down driving force of ESG integration is not expected
to change, and what has taken other markets a long time to implement is expected to be
implemented much faster in China. With the government’s efforts to establish a green
financial system, China’s regulatory environment will allow ESG integration to become
deeply rooted in China’s asset management industry.
Regulators will continue to draw on international experience and formulate policies
to build a solid framework on which ESG integration can thrive. At the same time, the
information infrastructure of the financial industry will accumulate, accelerated by the
opening up of China to the likes of MSCI and FTSE Russell. As the industry’s information
infrastructure becomes more robust, as information becomes more reliable and transpar-
ent, companies will be able to truly develop systematic methodologies for ESG integration.
Initial efforts for ESG integration were mostly focused on the listed companies’ end
and have since spread to the asset managers’ end. We are seeing information infrastruc-
ture initiative being taken by regulators and industry associations alike, such as reporting
guidelines for listed companies and for asset managers. However, unlike in other markets
where asset owners spearhead a lot of ESG integration efforts, asset owners in China have
been relatively slow to become involved. When ESG integration becomes a core consid-
eration at all levels, from asset owners to asset managers to listed companies, it will have
successfully become a default social principle in China, and that is when it will have signifi-
cant impact on the country and the world.
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INTERVIEW WITH CHINA’S CENTRAL BANK:
PEOPLE’S BANK OF CHINA
Interview with Yao Lei, Deputy Director General, Institute of Financial Research, the People’s
Bank of China.
reports.” Concepts of green and responsible investment have since then gradually emerged
and been getting popular. There are two major advances in recent years.
First, a series of incentives and support measures have been introduced, creat-
ing a favorable policy environment for ESG investment. In September 2018, the China
Securities Regulatory Commission (CSRC) revised the Code of Corporate Governance for
Listed Companies and established the ESG disclosure framework. In October, the Shanghai
Stock Exchange, as the chair member of the World Federation of Exchanges (WFE) led
the development and published the Principles for Sustainable Exchanges, which recom-
mends that its member exchanges publish ESG information disclosure guidelines. In
November, the Asset Management Association of China (AMAC) released the Guidelines
for Green Investment (Trial) to guide and standardize the green investment activities of
securities investment funds. The Guidelines stressed that “ESG responsible investment is
an emerging investment strategy for the asset management industry and also important
measure for the fund industry to implement green development and build a green finan-
cial system.”
Second, market players have been showing rising enthusiasm in implementing ESG
investment. More and more fund managers pay more attention to ESG factors in their
investment process. By the end of 2018, 20 institutions in mainland China have become sig-
natories of the PRI, an increase of 185% year-on-year. The Industrial and Commercial Bank
of China (ICBC) also participated in initiating and drafting of the UNEP FI’s Principles
for Responsible Banking. The size of responsible investment funds continues to grow. Take
public fund as an example: as of the end of 2018, there were four “social responsible”
investment funds with a total asset size of RMB 7.515 billion, and 58 funds investing in
areas of low carbon, environmental protection, green development, new energy, Beautiful
China, and sustainable development with a total asset size of RMB 31.698 billion. In addi-
tion, related index products continue to emerge, providing rich investment options in the
market. For example, the China Securities Index Company has launched 39 green and
ESG-related indices, covering both stocks and bonds assets.
How does the central bank promote ESG investment and encourage practitioners to con-
sider ESG-related factors in their portfolios?
International experience shows that governments have always played an important
role in encouraging institutional investors to make ESG investment, which is the same in
China. The PBOC, as an advocate and promoter of green finance and responsible invest-
ment, also plays an active role in promoting ESG investment and has done so through
several initiatives.
The first is establishing a standard system to promote the standardized development
of ESG investing. In 2018, the PBOC led the establishment of the Green Finance Standards
Working Group to study and build domestically harmonized, internationally convergent,
clear, and implementable green finance standards system. ESG rating standards and
related environmental information disclosure standards are the key tasks of the Working
Group. The collaborative study and work between regulators and market players for devel-
oping scientific-based, fair and implementable ESG investing standards will lay the founda-
tion for the subsequent introduction of incentives measures, and ultimately benefits the
standardized and enduring development of responsible investment.
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Interview with China’s Central Bank: People’s Bank of China
The second is improving the incentive mechanism and encouraging financial institu-
tions to pay attention to ESG factors. Since 2017, the PBOC has incorporated the green
credit performances of the deposit-taking institutions into the macro-prudential assess-
ment (MPA), incentivizing financial institutions to actively expand green credit business
and increase financial support to environmentally friendly projects. An important dimen-
sion for evaluating green credit performance is the ESG performance of the financial
institutions.
The third is emphasizing the ESG concept in developing the local green finance
reform and innovation pilot zones. In 2018, the PBOC encouraged the financial institu-
tions in the pilot zones to pilot mandatory environmental information disclosure. The
disclosure contents and format were studied and determined by using the self-regulatory
mechanism of the green finance industry. Financial institutions could force corporates to
disclose information and operate responsibly by disclosing their own ESG information.
The fourth is actively promoting and disseminating the green finance concepts, poli-
cies, and best practices through multilateral and bilateral frameworks such as G20, cen-
tral bank and regulatory green financial network (NGFS), and China-UK Economic and
Financial Dialogue. For example, pushing the central bank to implement the ESG concept
in its own investment process is a priority of NGFS’s work this year.
In the next step, the People’s Bank of China will continue to vigorously support ESG
investment, not only to popularize and promote the ESG investment concept in China,
but also by aligning with key strategies such as the Belt and Road Initiative to actively
implement responsible investment in the international investment process and enhance
the level of sustainable development of the relevant regions. On the one hand, PBOC will
take more consideration of the ESG factors into the central bank’s investment portfolios
and decision-making, and improve the implementation of the responsible investment prin-
ciples in the international investment. On the other hand, PBOC will work together with
the regulators to continue improving the policy framework, actively cultivate responsible
investors groups, encourage market players to develop and invest in ESG products, and
grow the ESG investment market.
How do you think ESG investing will develop in China in the next few years?
Looking ahead, ESG investment is promising in China. On the one hand, ESG invest-
ment has a huge “blue ocean” market. Green development has been raised as an important
national strategy: winning the battle against pollution is one of the three major tasks for
building a well-off society in the new era, and the traditional investment and economic
growth mode with high pollution and high consumption is not sustainable. Under this
context, responsible investment being increasingly in line with the economic restructur-
ing, the demand for ESG investment will continue to grow. According to the research
of the Ministry of Ecology and Environment and the China Council for International
Cooperation on Environment and Development, China’s green investment demand dur-
ing the 13th Five-Year Plan period will reach 3-4 trillion yuan per year. On the other hand,
ESG investment is more in line with the ecological environmental protection requirements
of the local and social subjects.
In 2016, the General Office of the CPC Central Committee and the General Office
of the State Council issued the “Measures for the Evaluation and Assessment of the
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SECTION 4
MARKET ANALYSIS:
HONG KONG SAR,
CHINA
THE IMPACT OF ESG FACTORS ON CAPITAL
MARKETS AND INVESTMENT PRACTICES:
SURVEY DATA
IMPACT ON PRICES AND YIELDS
Through our global ESG integration survey, we wanted to understand how often Hong
Kong SAR investors consider that environmental, social, or governance issues affect share
prices and bond yields in the Hong Kong SAR capital markets in 2017, and how often they
believe these factors will impact share prices and bond yields in five years’ time (2022).
Corporate governance is currently the ESG factor most impactful to share prices and bond
yields, but this dynamic is set to change, according to survey respondents. Environmental
and social factors are likely to impact share prices and bond yields much more by 2022,
according to Hong Kong SAR financial professionals (Table 13).
TABLE 13: THE IMPACT OF ESG ISSUES IN 2017 AND THE EXPECTED IMPACT IN FIVE YEARS’
TIME (2022) ON SHARE PRICES, CORPORATE BOND YIELDS/SPREADS, AND
SOVEREIGN DEBT YIELDS
AFFECTED IN 2017 WILL AFFECT IN 2022
ESG Issues Impact on Share Prices
Governance 71% 80%
Environmental 30% 64%
Social 33% 63%
ESG Issues Impact on Corporate Bond Yields/Spreads
Governance 49% 67%
Environmental 18% 51%
Social 21% 49%
ESG Issues Impact on Sovereign Debt Yields
Governance 44% 53%
Environmental 19% 44%
Social 30% 46%
Note: Percentages represent respondents who answered “often” or “always.”
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The Impact of ESG Factors on Capital Markets and Investment Practices: Survey Data
TABLE 14: THE IMPACT OF ESG RISKS AND OPPORTUNITIES ON SHARE PRICES, CORPORATE
BOND YIELDS/SPREADS, AND SOVEREIGN DEBT YIELDS
AFFECT “OFTEN” OR “ALWAYS”
HOW OFTEN DO ESG RISKS AND OPPORTUNITIES AFFECT SHARE PRICES?
Environmental risks 34%
Environmental opportunities 25%
Social risks 33%
Social opportunities 28%
Governance risks 70%
Governance opportunities 41%
HOW OFTEN DO ESG RISKS AND OPPORTUNITIES AFFECT CORPORATE
BOND YIELDS/SPREADS?
Environmental risks 19%
Environmental opportunities 18%
Social risks 26%
Social opportunities 16%
Governance risks 37%
Governance opportunities 26%
HOW OFTEN DO ESG RISKS AND OPPORTUNITIES AFFECT SOVEREIGN
DEBT YIELDS?
Environmental risks 23%
Environmental opportunities 16%
Social risks 28%
Social opportunities 25%
Governance risks 40%
Governance opportunities 35%
2%
1%
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DRIVERS OF AND BARRIERS TO ESG
INTEGRATION: SURVEY DATA AND
WORKSHOP FEEDBACK
CFA Institute and PRI thank Deloitte for its help in organizing our ESG
Integration workshops in Hong Kong SAR. With their assistance, we were able
to work with investors and analysts to better understand the current state of ESG integration.
Participants realize that ESG integration is not a simple process and that investors
need to look deeply at companies and their practices to understand the ESG risks and
opportunities that affect valuations.
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Drivers of and Barriers to ESG Integration: Survey Data and Workshop Feedback
risk can be turned into an environmental opportunity when, say, a company manages its
environmental risk well. This provides investors with investment opportunities.
As is the case in most markets, some investors need to see more information on the
quantifiable link between performance and ESG. Fundamental research will help increase
ESG in Asia. It seems the track record or historic background for ESG is not there to
make it a case to encourage or convince investors on ESG. More proof will help incentivize
people to do ESG. The asset management industry is very return driven and, as it is hard
to quantify ESG, it is difficult to show the return element of ESG.
Drivers
Risk management and client demand were the main drivers of ESG integration in Hong
Kong SAR, as they are in most markets. One participant noted that risk management and
client demand can be considered the same by many investors, i.e., clients are demanding
that investment managers monitor ESG risks.
This client demand is only likely to increase, as there is a rising awareness for ESG,
which is market driven. Institutional investors and some retail investors want ESG invest-
ments. The demographics are changing across Asia, increasing the demand.
One thing not included in our survey in the list of drivers is “principle”doing
ESG integration because is the right thing to do. Lots of investors do it for the principle.
No investors want to invest in companies that have horrendous social or environmental
practices.
Barriers
A limited understanding of ESG integration and ESG issues was the top barrier to ESG
integration in Hong Kong SAR.
Education, awareness, and leadership were seen as significant issues. Investors aren’t
knowledgeable of ESG but awareness of it is on the rise. There is a need for more edu-
cation on ESG in professional qualifications and university courses. There is a need to
educate companies on how to translate ESG from a corporate perspective to an investor
“materiality” perspective. It is also the case that investors need to learn how to clearly artic-
ulate material ESG issues to companies and how they would like to be communicated.
Both speak a different language; for example, companies talk of CSR and investors talk
of ESG.
The definitional problem around ESG integra- A limited understanding of ESG
tion was also a concern. There are lots of definitions integration and ESG issues was
and no common standards. There is a need for a tax- the top barrier to ESG integra-
onomy and better definitions. There is a need for an tion in Hong Kong SAR.
understanding of how investors price ESG.
The lack of comparable and historical data was
cited as a concern by a number of participants. There is low level of disclosure on com-
pany ESG metrics. It is hard to find the information. Companies may not disclose all the
information. Investors have to spend time also to assess which ESG information is relevant.
Comparability of data is also an issue. In some instances, there is little data, and in other
cases there is a lot but you don’t know what it means and you can’t benchmark it. No assur-
ance of data means you have to take the data as gospel, which could be misrepresenting
the value of the company. Participants asked whether that approach was wise.
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Drivers of and Barriers to ESG Integration: Survey Data and Workshop Feedback
Figure 16 shows the number of listed companies domiciled in Hong Kong SAR per
sector that report on ESG factors and the breakdown of environmental, social, and gover-
nance factors. The total number of listed companies with a market cap of more than USD
1 billion is 204, with 68.1% of these companies reporting on ESG factors. The two largest
sectors are consumer discretionary (43 companies) and financials (70 companies), with
all other sectors consisting of less than 20 companies. Looking at companies reporting
on ESG factors, the coverage is highest in some of the smaller sections, i.e., communica-
tions (90.0%), consumer staples (86.7%), energy (83.3%), materials (80.0%), and utilities
(86.7%). The three largest sectors, consumer discretionary, financials, and industrials,
are characterized by less coverage of ESG reporting at 69.8%, 61.4%, and 57.9%, respec-
tively. The health care and technology sectors have the lowest coverage of ESG reporting
at 28.6% and 55.6%, which takes them both under the minimum number of companies to
be included in the ESG data analysis. Even though the energy sector’s coverage of ESG
reporting is high, the sector is very small and also falls under the limit.
When zooming in on the coverage of environmental, social, and governance report-
ing, all companies with an ESG disclosure score report on governance factors. The coverage
of social and environmental factors is also very high. For instance, in the communications
sector, 9 of 10 companies report on ESG factors, whereas 8 of 10 report on social and envi-
ronmental factors, respectively. The consumer discretionary, consumer staples, financials,
and industrials sectors all have slightly higher coverage of social reporting than environ-
mental, going from 60.5% to 58.1% in consumer discretionary, 80% to 60% in consumer
staples, 60% to 54.3% in financials, and 52.6% to 47.4% in industrials.
94 WWW.CFAINSTITUTE.ORG
Trends in ESG Company Data
70
60
Number of companies
50
40
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Figure 17 shows the development of the median ESG disclosure score from 2011 to
2016 for listed companies in Hong Kong SAR. As mentioned, the energy, health care, and
technology sectors have been excluded, as the sectors are too small. The rest of the 10 sec-
tors clearly show a large increase in ESG reporting from 2011 to 2016. All sectors have seen
improvements, although the increase differs across sectors. The financial sector had the
highest median ESG disclosure score both in 2011 and 2016 and almost saw a doubling in
score from 18.8 to 34.3. The second highest absolute increase happened in the consumer
staples sector, which went from having the lowest score in 2011 at 11.16 to the second low-
est in 2016 at 23.67, which means that the median score more than doubled. The com-
munications and utilities sectors increased from 14.88 to 27.16 and 15.5 to 26.86, showing
large increases and ending as the sectors with the second and third highest median ESG
disclosure scores in 2016. Compared with the rest of the sectors in Hong Kong SAR, the
industrials and materials sectors showed lower growth in median ESG disclosure scores,
as they went from 17.77 to 25.62 and 13.43 to 21.07, respectively. For the industrials sector,
they went from having the second highest score in 2011 to the fourth highest in 2016,
whereas the materials went from having the second lowest score in 2011 to the lowest
FIGURE 17: MEDIAN 2011 AND 2016 ESG DISCLOSURE SCORES FOR LISTED COMPANIES
DOMICILED IN HONG KONG SAR
50 40
45 35
40
30
35
30 25
25 20
20 15
15
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Companies reporting on ESG factors ESG score (2016) ESG score (2011)
median ESG disclosure score in 2016. Interestingly, the scores do not seem correlated to
the number or coverage of ESG disclosure scores for the different sectors.
Figure 18 shows the breakdown of the 2016 median environmental, social, and gover-
nance scores for listed companies based in Hong Kong SAR. As with all other markets, the
governance score is the highest in all sectors. Furthermore, the social score is higher than
the median environmental disclosure score in all sectors. Starting with the governance
score, the score for the communications, consumer discretionary, consumer staples, indus-
trials, and utilities sectors is 51.79, indicating high standardization in governance disclo-
sure in Hong Kong SAR. The financial sector scores a bit higher at 53.57 and the materials
sector a bit lower at 50.
The median social disclosure score is also standardized across sectors, although not to
the same degree as governance reporting. The materials sector falls behind other sectors
with a median social disclosure score of 21.93. The consumer staples and utilities sectors
both have median scores of 28.07, and the communications and consumer discretionary
sectors have a score of 29.82. The highest-scoring sectors are financials and industrials
at 30.83 and 33.33, respectively. These are also the two sectors with the lowest differ-
ence between social and environmental reporting, as the median environmental disclo-
sure scores for financials and industrials are 29.07 and 29.46. The sector with the third
highest median environmental disclosure score is the communications sector at 16.68,
and the consumer discretionary (15.63) and utilities (15.50) sectors are not far behind.
The two sectors with the lowest environmental disclosure scores were also the sectors with
the lowest overall median ESG disclosure score, i.e., consumer staples and materials. Their
median environmental scores were at 11.63 and 6.20, respectively.
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Trends in ESG Company Data
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Companies reporting on ESG factors Environmental score Social score Governance score
To sum up, the proportion of companies in Hong Kong SAR reporting on ESG factors
is the second lowest in APAC at 68.1%. However, it is the only market where the median
governance disclosure score of the companies that do report on ESG factors is at 50 or
above in all sectors. It is also the only market where the financial sector has the highest
median ESG disclosure score as well as highest or second highest environmental, social,
and governance disclosure score.
What changes have you seen with regard to ESG investing during recent years?
We have seen a noticeable increase during 2018 in the number of new fund applica-
tions and applications for a change of investment strategy to adopt an ESG investment
theme. Currently, there are over 20 SFC-authorized funds with an investment focus on cli-
mate, green, environmental, or sustainable development. On April 11, 2019, the Securities
and Futures Commission (SFC) issued a circular to provide guidance to management com-
panies of SFC-authorized unit trusts and mutual funds on enhanced disclosures for SFC-
authorized green or ESG funds.
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Interview with the Hong Kong Securities and Futures Commission—A Major Financial Regulator in Hong Kong SAR
Is ESG investing popular among local investors? Are foreign investors influencing local
ESG practices?
As part of our initiatives under the SFC’s Strategic Framework for Green Finance, the
SFC is working closely with the Investor and Financial Education Council to support inves-
tor awareness of and capacity building in green finance and investment-related matters.
On March 15, 2019, the Investor and Financial Education Council launched a dedicated
web page on The Chin Family website to introduce green finance to the general public.
The SFC will also create a central database of SFC-authorized green or ESG funds on its
website to enhance the visibility of these funds.
Foreign investors do play an important part in influencing local ESG practices. Many
institutional investors who participate in Hong Kong’s markets are becoming more vocal
in asking ESG-related questions as part of hiring or retaining asset managers.1
How do you see your role as the regulator of financial market in promoting ESG invest-
ing? How are you encouraging practitioners to consider ESG factors into their portfolios?
As a regulator, we approach green finance a bit differently from the others. A few years
ago, one would say it’s a corporate social responsibility to invest responsibly or to reduce
pollution. There has been a shift—it is often said that more frequent unusual weather
and climate events globally, such as extreme temperatures, wildfires, floods, and storms,
are increasingly disrupting resource availability, production capacity, supply chains, and
increase business operational and maintenance costs. These could affect energy and com-
modity prices, corporate bonds, equities, and derivatives contracts, and may lead to a reap-
praisal of prices of certain sectors.
If the environment and climate change are giving rise to financial risks, are those
risk factors properly assessed and managed? Another question is whether there should be
greater transparency of these risks and greater disclosure on how these activities are being
handled by asset managers.
As part of the SFC’s Strategic Framework for Green Finance announced in September
2018, we have launched a survey on March 29, 2019 to better understand the current prac-
tices of licensed asset managers on how they integrate environmental and climate factors
into their investment, risk management processes, post-investment ownership practices,
and disclosure. The survey covers asset managers of different types and sizes, as well as
those using different investment strategies. A similar survey will also be conducted among
asset owners who participate in Hong Kong’s financial markets. Based on the survey out-
come, we will consider appropriate policies, codes, and guidance in relation to how and to
what extent asset managers disclose the integration of ESG factors into their investment
and risk analysis processes.
1
Hong Kong Securities and Futures Commission. “Strategic Framework for Green Finance,” September 21,
2018. https://www.sfc.hk/web/EN/files/ER/PDF/SFCs%20Strategic%20Framework%20for%20Green%20
Finance%20-%20Final%20Report%20(21%20Sept%202018.pdf.
Are companies taking sustainability issues seriously? What are the requirements on ESG
reporting for companies?
In 2013, The Hong Kong Exchanges and Clearing Limited (HKEX) introduced the
ESG Reporting Guide (Appendix 27 to the Listing Rules) as a voluntary guide. Following
a market consultation in 2015, the Listing Rules were amended to require issuers to report
on ESG matters in accordance with the disclosure requirements of the ESG Guide on a
“comply or explain” basis. The ESG Guide contains 11 Aspects under two subject areas:
three Aspects under “Environmental” and Eight aspects under “Social,” The amendments
came into effect in two phases:.
Phase 1: For financial years commencing on or after 1 January 2016, each aspect
requires general disclosures on a “comply or explain” basis about the issuer’s policies, and
in some cases, information on compliance with the relevant laws and regulations that have
a significant impact on the issuer.
Phase 2: For financial years commencing on or after 1 January 2017,, the “comply or
explain” requirement to report on the key performance indicators under “Environmental”
became effective
Recent reviews by the HKEX2 and the industry3,4 both called for enhanced board
involvement in ESG reporting. ESG is a governance matter, and the tone has to be set
from the top. Studies also show that a majority of companies still do not consider ESG as a
principal risk. ESG risks are not widely discussed, and disclosures do not focus on material
issues. Also, many ESG reports fail to provide a balanced view, as they focus more on posi-
tive achievements.
There is an increased demand for effective ESG reporting frameworks as more mar-
ket participants become interested in sustainable economic development. As a result, the
SFC signed up as a supporter of the disclosure recommendations of the international Task
Force on Climate-related Financial Disclosures (TCFD), and the HKEX recently updated
its guidance on ESG reporting, taking into account the TCFD’s disclosure recommenda-
tions. The HKEX has reviewed the ESG reporting framework in Hong Kong SAR and con-
ducted soft consultation with a number of stakeholders on proposed changes to the Listing
Rules/ESG Guide. HKEX is finalizing a draft consultation paper with a view towards con-
sulting the market in mid-2019.
2
HKEX Group. “Analysis of Environmental, Social and Governance Practice Disclosure in 2016/2017.” May
2018https://www.hkex.com.hk/-/media/HKEX-Market/Listing/Rules-and-Guidance/Other-Resources/
Exchanges-Review-of-Issuers-Annual-Disclosure/ESG-Guide/esgreport_2016_2017.pdf?la=en.
3
KPMG. “The ESG Journey Begins.” November 2017. https://assets.kpmg/content/dam/kpmg/cn/pdf/
en/2017/11/the-esg-journey-begins.pdf.
4
EY. “A Review of Hong Kong Listed Companies’ Progress in Environmental, Social and Governance (ESG)
Disclosure.” October 2018. https://www.ey.com/cn/en/newsroom/news-releases/news-2018-ey-a-review-of-
hong-kong-listed-companies-progress-in-esg-disclosure.
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Interview with the Hong Kong Securities and Futures Commission—A Major Financial Regulator in Hong Kong SAR
How will ESG investing develop in Hong Kong SAR over the next few years?
Mainland China has made green finance an important priority as it transitions to a
sustainable economy. It is also part of the Outline Development Plan for the Guangdong-
Hong Kong SAR–Macao Greater Bay Area to support the development of Hong Kong SAR
into a green finance center in the Greater Bay Area.5 This is a valuable opportunity for
Hong Kong SAR to position itself as China’s international financial center to complement
the Mainland’s green development ambitions and to connect green finance flows between
the Mainland and the rest of the world.
Hence, any credible plan for Hong Kong SAR to develop green finance would need to
be comprehensive and far reaching. Various authorities and organizations in Hong Kong
SAR have been formulating policies and initiatives which aim at developing a comprehen-
sive ecosystem for green finance. ESG investing will be a core part of this ecosystem, and
it is important that asset managers start integrating environmental and climate change
considerations into every aspect of their own strategic direction, governance, management
of risks and opportunities, and disclosure.
5
Greater Bay Area, Hong Kong. “Outline Development Plan for the Guangdong-Hong Kong-Macao Greater
Bay Area.” February 2019. https://www.bayarea.gov.hk/filemanager/en/share/pdf/Outline_Development_
Plan.pdf.
What is the role of the Financial Services Development Council in the Hong Kong SAR
market, and what is the FSDCs role in ESG integration in Hong Kong SAR?
As a high-level, cross-sectoral advisory body to the Hong Kong SAR Government, the
FSDC has the mission to engage the industry in formulating proposals to promote the further
development of Hong Kong SAR’s financial services industry.
ESG is one of the matters that the FSDC has been keen to look into. We published a
paper on green finance in 2016 and then a paper on ESG strategy a few months ago. Going
forward, we will continue to organize events with industry associations and other stake-
holders to present the value proposition of ESG integration, with an aim to promoting the
joint efforts of the public and private sectors for the further development of an ESG invest-
ment ecosystem in Hong Kong SAR.
The FSDC recently wrote a paper on ESG strategy in Hong Kong SAR. Could you tell us
how this report came about and what recommendations it makes?
Sustainable investment has become one of the fastest growing areas in recent years.
The FSDC believes Hong Kong SAR needs a comprehensive ESG strategy in order to stay
competitive as a preferred international financial center. In view of this, a working group
was formed in early 2018 to study the subject matter, and subsequently the ESG paper was
issued in November of the same year.
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Interview with a Hong Kong SAR Major Market Player: Financial Services Development Council
The paper seeks to present a number of recommendations on the part of the policy-
makers, including (1) the Government to take the leadership role in encouraging public
funds’ support for ESG integration, (2) the Hong Kong Monetary Authority to scale up
ESG requirements on their external investment managers, (3) the Mandatory Provident
Fund Schemes Authority to incorporate ESG factors into its trustee approval and monitor-
ing process and to encourage trustees to take into account international ESG standards,
(4) the Securities and Futures Commission (SFC) to strengthen the emphasis on ESG
through upgrading the Principles of Responsible Ownership to at least “comply or
explain,” (5) the SFC and the other regulators to provide more guidance on ESG thematic
investment products, and (6) the Hong Kong Stock Exchange to strengthen the emphasis
on ESG for both listing applicants and listed companies.
With this being said, the effort of the private sector is also crucial in developing a
robust ESG investment ecosystem in Hong Kong SAR.
What organizations in Hong Kong SAR are doing a good job at ESG integration and what
still needs to be done?
Instead of pinpointing a few organizations, I’d rather to share my observation that
ESG integration has become more widespread in the last few years in Hong Kong SAR,
both in terms of companies’ adoption and quality of ESG reporting and in terms of the
investors’ awareness of the importance of ESG integration. For the further enhancement
of this ESG investment ecosystem, different key stakeholders should collaborate and
cooperate—for example, financial investors can be more expressive for their demand in
the types of ESG information while investee companies should keep on improving the
quality of their ESG disclosure. Other stakeholders, such as policymakers and the large
cluster of services providers (including sell-side researchers/brokers, ESG index publishers,
and ESG analysis providers) also play a pivotal role.
What are the drivers and barriers to ESG integration in Hong Kong SAR?
The benefits of ESG integration I have just mentioned are definitely drivers to ESG
integration in Hong Kong SAR. Meanwhile, the regulatory push is also a possible cause
for the uptake of ESG integration.
According to a number of surveys, the board’s commitment to ESG, possibly due to
a lack of discussions on the board’s role in the ESG reports, is one of the key obstacles
for the companies in Hong Kong SAR to improve their disclosure quality. Knowledge in
conducting ESG integration (for example in terms of doing materiality assessment) and
the cost incurred in adopting ESG integration are also some common barriers.
TABLE 17: THE IMPACT OF ESG ISSUES IN 2017 AND THE EXPECTED IMPACT IN FIVE YEARS’
TIME (2022) ON SHARE PRICES, CORPORATE BOND YIELDS/SPREADS, AND
SOVEREIGN DEBT YIELDS
AFFECTED IN 2017 WILL AFFECT IN 2022
ESG ISSUES IMPACT ON SHARE PRICES
Governance 66% 76%
Environmental 29% 61%
Social 29% 55%
ESG ISSUES IMPACT ON CORPORATE BOND YIELDS/SPREADS
Governance 48% 64%
Environmental 30% 55%
Social 30% 45%
ESG ISSUES IMPACT ON SOVEREIGN DEBT YIELDS
Governance 36% 64%
Environmental 32% 59%
Social 27% 59%
Note: Percentages represent respondents who answered “often” or “always.”
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The Impact of ESG Factors on Capital Markets and Investment Practices: Survey Data
TABLE 18: THE IMPACT OF ESG RISKS AND OPPORTUNITIES ON SHARE PRICES, CORPORATE
BOND YIELDS/SPREADS, AND SOVEREIGN DEBT YIELDS
AFFECT “OFTEN” OR “ALWAYS”
HOW OFTEN DO ESG RISKS AND OPPORTUNITIES AFFECT SHARE PRICES?
Environmental risks 29%
Environmental opportunities 29%
Social risks 29%
Social opportunities 26%
Governance risks 61%
Governance opportunities 53%
HOW OFTEN DO ESG RISKS AND OPPORTUNITIES AFFECT CORPORATE
BOND YIELDS/SPREADS?
Environmental risks 41%
Environmental opportunities 32%
Social risks 36%
Social opportunities 32%
Governance risks 59%
Governance opportunities 41%
HOW OFTEN DO ESG RISKS AND OPPORTUNITIES AFFECT SOVEREIGN
DEBT YIELDS?
Environmental risks 50%
Environmental opportunities 41%
Social risks 32%
Social opportunities 23%
Governance risks 50%
Governance opportunities 41%
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DRIVERS OF AND BARRIERS TO ESG
INTEGRATION: SURVEY DATA AND
WORKSHOP FEEDBACK
CFA Institute and PRI thank the Bombay Stock Exchange for its help in organiz-
ing our ESG Integration workshops in India. With their assistance, we were able
to work with investors and analysts to better understand the current state of ESG
integration.
ESG investing will become popular, noting that “ESG” will become the new buzzword in
India as it is outside of the country. There are mutual funds that have already started
their ESG journey and are exploring the different approaches to integrating ESG factors
into their investment process. There are some investors reporting on their ESG activi-
ties that align with the recommendations of the Task Force on Climate-related Financial
Disclosures (TCFD).
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Drivers of and Barriers to ESG Integration: Survey Data and Workshop Feedback
institutional investors in the Indian market, which has made a difference in other markets.
One participant said that they can only count one or two domestic asset owners doing it.
Another participant said there is no pressure
to be ESG-compliant or to put money in a While the awareness is increasing due
green fund. As there have been a lack of ESG to foreign investors, there isn’t the same
demands made on investment managers— level of interest from local investors. ESG
such as rules to restrict investments or an investing is not receiving attention from
ESG-integrated risk management process— the larger institutional investors in the
investment managers are not developing ESG Indian market.
products or becoming ESG-compliant.
Foreign investors are training their Indian investment managers on ESG investing.
However, nearly all domestic institutional investors, retail investors, and people on the
street do not know what people are talking about when we refer to “ESG investing.” Some
confuse ESG investing with corporate social responsibility (CSR); others will think purely
about exclusionary screening.
The many acronyms, definitions, and practices related to ESG investing is a cause
of misunderstanding in India. In addition, the variety of ESG-related reporting frame-
works—such as PRI (Principles for Responsible Investment), IIRC (International
Integrated Reporting Council), and GRI
(Global Reporting Initiative)—are also caus- The many acronyms, definitions and
ing confusion and are considered a burden practices related to ESG investing is a
and another layer of bureaucracy. Another cause of misunderstanding in India.
participant noted that when you are talking In addition, the variety of ESG-related
to the regulator, you find people talking in reporting frameworks—such as PRI,
different terms to the regulator and asking IIRC, and GRI—are also causing confu-
for different information. Despite all having sion and are considered a burden and
the same goal to mainstream all the environ- another layer of bureaucracy
mental and social issues in all financing activ-
ities, it has the opposite effect.
ESG REPORTING
Some participants believe that the level of ESG disclosure is improving. Many industries
are starting to show their air quality data on their website. Even the regulators are disclos-
ing air, noise, and water pollution statistics on their website. Disclosing environmental data
is becoming more prominent.
However, the increasing levels of ESG data are starting from a low baseline. One par-
ticipant said that hardly any corporations are paying attention to climate, and only the
large ones. In addition, much of the reported ESG data is related to nonmaterial issues.
Participants would like to see more integrated reporting focused on material issues.
Companies are using ESG reporting standards such as GRI, although investors are see-
ing companies treat ESG issues differently. Some think of ESG reporting as a compliance,
box-ticking exercise. Others believe that it adds a financial burden. One company said that
they have 300 meetings every year with investors and only one investor has talked about
ESG issues. Some investors see a lot of interest from companies to align to the demand of
ESG investors.
REGULATION
There have been some improvements with the current environmental standards, but the
positive shift is not fast enough, according to some. Environmental due diligence is very
complicated, with multiple acts covering different environmental issues. One participant
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Drivers of and Barriers to ESG Integration: Survey Data and Workshop Feedback
felt that ESG standards and regulations are increasing delays to completion of projects. For
example, permission to create a new airport could be delayed because of environmental
and social checks, even though the delay is for all the right reasons.
However, most participants felt that ESG issues improves the ease of doing business in
India, and the delays come from mechanical process of permission granting/permit grant-
ing, which needs streamlining. Participants felt that if one is implementing ESG regulation
well, one is helping business. Although environmental legislation may help the environ-
ment at the expense of social standards in the short term, it will protect people over the
long term.
Drivers
Screening techniques are a common ESG incorporation approach in India. Risk manage-
ment seems equally popular among investment managers. Due to pressure from the World
Bank, an investor put in place an ESG policy in 1994. After enacting the policy, the inves-
tor started to learn more about ESG investing through doing it. After several years, their
approach to ESG investing is to apply techniques that are used as a mechanism for managing
risk.
Another investor said that ESG factors are just one set of factors that they analyze.
Their ESG analysis is used in their risk management tools and screening processes and
utilized in company engagements. A private equity manager looks at ESG solely from per-
spective of value creation. They interact with stakeholders and help the business integrate
ESG practices to mitigate risks and produce long-term positive returns.
Among the participants, client demand was considered a strong driver of ESG invest-
ing in India. It was also considered necessary for regulation to achieve acceptance among
investors. As supported by the survey, some participants felt that regulation would be a
bigger driver than client demand.
By creating a level playing field for all companies, ESG regulation can ensure that all
companies start to report on and manage their ESG performance. Consequently, all inves-
tors will review their investee companies’ adherence to the ESG regulations and ESG inves-
tors would engage with an entity to encourage them to do more beyond the requirements
of regulation, pushing the bar up even higher.
Barriers
As is the case in most markets covered by the CFA-PRI study, Indian-based respondents to
the survey considered limited understanding of ESG issues and ESG integration as a top
barrier. Investors are not clear on what the ESG issues are that are material. One partici-
pant mentioned that when they have talked about ESG, the response is generally, “Why is
governance attached to ‘ESG’? Governance encompasses everything, including environ-
mental and social issues. Is it environmental governance and social governance or are E,
S, and G three separate pillars?” These valid questions highlight the mystery surrounding
ESG investing.
Limited data has also prevented investors from looking at environmental and social
issues. The variety of reporting standards has also been a barrier. The big international
players are demanding environmental and social policies and reporting frameworks from
companies. They are looking for Indian compa-
nies to meet international standards, not country- Without consensus on a reporting
specific standards, which can be very challenging standard, comparisons of
as companies want to use the national standards. companies’ ESG performance will
Without consensus on a reporting standard, com- remain difficult.
parisons of companies’ ESG performance will
remain difficult.
114 WWW.CFAINSTITUTE.ORG
TRENDS IN ESG COMPANY DATA
We partnered with Bloomberg to analyze the transparency of ESG disclosure in each market for com-
panies with a market cap of above USD 1 billion. The information in these figures comes from the
analysis of Bloomberg’s ESG disclosure scores, which are based on publicly available data; they are
a score of how companies report on ESG, not necessarily how they perform. The score is based on
company disclosures on different environmental, social, or governance disclosure points. Each type of
disclosure is scored from 0 to 100, and then aggregated to a single environmental, social, or gover-
nance score. These are again aggregated to a combined ESG score. We have only included scores for
sectors with more than seven listed companies. (For more information, see “Appendix: Methodology.”)
Figure 21 shows the number of listed companies at the end of 2016 with a market cap
above USD 1 billion domiciled in India per sector that report on ESG factors and a
40
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breakdown of environmental, social, and governance factors. Out of 205 listed companies,
181, i.e., 88.3%, reported on ESG factors. The distribution among sectors is fairly even, with
all sectors having a coverage of more than 80% (consumer discretionary, 88.9%; c onsumer
staples, 88.2%; financials, 87.2%; health care, 85.2%; industrials, 82.6%; materials, 84.6%;
and utilities, 86.7%) and communications, energy, and technology having 100% coverage
of ESG reporting.
Drilling down into the specific themes, all companies reporting on ESG factors, report
on governance. In the energy sector, 100% of companies report on environmental, social,
and governance factors, making it the best covered sector in all the analyzed markets in
APAC. In the remaining sectors, social reporting is either done by the same number of
companies or more compared to environmental reporting. In the consumer discretion-
ary (66.7%), consumer staples (70.6%), industrials (73.9%), materials (73.1%), and utilities
(80.0%) sectors, the social and environmental reporting coverage is equal. In the technol-
ogy sector, 9 of 10 companies report on social factors, whereas 8 report on environmental
factors. The last three sectors, communications, financials, and health care, have much
lower coverage for both social and environmental reporting than the other sectors. Of the
three, the financial sector coverage is 61.5% for social factors and 53.9% for environmen-
tal factors. The communications sector has a higher social coverage at 55.6% compared
with 51.9% in the health care sector, but lower environmental coverage with 44.4% versus
48.2% in health care.
Figure 22 shows the development of the median ESG disclosure score for listed Indian
companies from 2011 to 2016. As seen in Figure 22, the communications sector is the only
one that has stayed the same at a median disclosure score of 11.16. This makes it the sector
FIGURE 22: MEDIAN 2011 AND 2016 ESG DISCLOSURE SCORES FOR LISTED COMPANIES
DOMICILED IN INDIA
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Companies reporting on ESG factors ESG score (2016) ESG score (2011)
116 WWW.CFAINSTITUTE.ORG
Trends in ESG Company Data
with the lowest score in 2016, as well as the second lowest median ESG disclosure score in
2011, although in 2011, the consumer staples, health care, and technology sectors also had
scores of 11.16. The sector with the lowest 2011 median ESG disclosure score was consumer
discretionary, with a score at 10.33, but the sector saw a significant increase to 18.60 in 2016,
surpassing the financials and health care sectors, which increased from 11.40 and 11.16 to
16.45 and 17.36 from 2011 to 2016, respectively. The energy and materials sectors had the
highest 2011 median ESG disclosure scores (20.25 and 24.38), and were both in the top three
in 2016 at 32.02 and 28.10. The largest increase in the median ESG disclosure score hap-
pened in the technology sector, where the score went from 11.16 to 48.55 in just five years,
indicating significant improvement of ESG disclosure in that sector. Overall, the median ESG
disclosure score improved significantly over the five years. Apart from the already-mentioned
sectors, the consumer staples sector saw more than a doubling of the median ESG disclosure
score from 11.16 in 2011 to 25.62 in 2016. The industrial and utilities sectors are a bit more
static, as they have gone from 15.08 and 14.46 to 22.73 and 19.83, respectively.
Figure 23 shows the breakdown of the 2016 median environmental, social, and gover-
nance scores per industry for companies domiciled in India. The distribution of scores is
consistent with other markets in the Asia Pacific region in that companies in India report
most on governance factors and generally second most on social factors, and least on
environmental factors. The technology sector is an anomaly, with a median environmen-
tal disclosure score slightly higher than the social score. Starting with governance, there
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Companies reporting on ESG factors Environmental score Social score Governance score
is some standardization across sectors, although not as much as seen in other markets.
At the lower end, the median governance disclosure score was 42.86 in the financials sec-
tor and 44.64 in both the consumer discretionary and health care sectors. The communi-
cations, consumer staples, industrials, and utilities sectors all have governance reporting
that gives them a score of 48.21. The two sectors with most reporting on governance fac-
tors, according to the median governance disclosure score, are materials (50.89) and tech-
nology (55.36).
The energy sector’s median governance disclosure score (46.43) is just below the
majority of sectors, but the median social disclosure score is the highest at 46.15, which
is the closest to the governance score in all of the sectors, both in India and in the other
markets analyzed. At the bottom, the financials sector’s median social disclosure score is
25.83, with health care being the only other sector with a score of less than 30 (27.19).
The communications (33.33), consumer discretionary (31.58), consumer staples (30.07),
and utilities (32.46) sectors all had scores in the low 30s for social reporting, which aligns
with the governance scores in the same sectors not being among the highest, but also not
the lowest. In the materials sector, the median social disclosure score was third highest at
40.35, which is a similar distance to the technology sector’s social score of 43.86, as the two
sectors’ governance scores were from each other.
Interestingly, in spite of having the second highest median social disclosure score at
43.86, the median environmental disclosure score for the technology sector is higher at
45.74. This means that the technology sector has more than twice the disclosure score
of any other sector, indicating much more environmental reporting. The sector with the
second highest median environmental disclosure score is the energy sector at 19.77, which
is consistent with also having a high social disclosure score—although the governance dis-
closure score was relatively low compared with the other sectors. The sector with the low-
est score is, again, the financial sector, which shows a median environmental disclosure
score of 5.35 and the utilities sector not being far behind at 6.98. The communications,
health care, and industrials sectors report a bit more on environmental factors, showed
by a median environmental disclosure score of 10.34, 9.30, and 10.85, respectively. The
consumer discretionary and consumer staples sectors again have similar medium scores
of 13.96 and 13.18, whereas the materials sector, consistent with social and governance
disclosure, reports a bit more on environmental factors, illustrated by a higher median
environmental disclosure score (16.28).
Analyzing ESG reporting by Indian listed companies with a market cap above USD 1
billion, there is a clear trend that the materials and energy sectors are doing well across
environmental, social, governance, and combined ESG disclosure, with the technology sec-
tor really outperforming all other sectors—seemingly driven by extensive environmental
reporting relative to the other sectors. At the other end, the financial sector was consis-
tently underreporting in all themes. But as only four of the nine companies reporting on
ESG factors in the communications industry report on environmental factors and only five
of nine report on social factors, the combined median ESG disclosure score underper-
formed the financial sector’s.
118 WWW.CFAINSTITUTE.ORG
SECTION 6
MARKET ANALYSIS:
JAPAN
THE IMPACT OF ESG FACTORS ON CAPITAL
MARKETS AND INVESTMENT PRACTICES:
SURVEY DATA
TABLE 21: THE IMPACT OF ESG ISSUES IN 2017 AND THE EXPECTED IMPACT IN FIVE
YEARS’ TIME (2022) ON SHARE PRICES, CORPORATE BOND YIELDS/SPREADS,
AND SOVEREIGN DEBT YIELDS
AFFECTED IN 2017 WILL AFFECT IN 2022
ESG ISSUES IMPACT ON SHARE PRICES
Governance 63% 69%
Environmental 17% 55%
Social 37% 61%
ESG ISSUES IMPACT ON CORPORATE BOND YIELDS/SPREADS
Governance 36% 51%
Environmental 15% 41%
Social 19% 39%
ESG ISSUES IMPACT ON SOVEREIGN DEBT YIELDS
Governance 14% 36%
Environmental 8% 31%
Social 12% 32%
Note: Percentages represent respondents who answered “often” or “always.”
120 WWW.CFAINSTITUTE.ORG
The Impact of ESG Factors on Capital Markets and Investment Practices: Survey Data
122 WWW.CFAINSTITUTE.ORG
DRIVERS OF AND BARRIERS TO ESG
INTEGRATION: SURVEY DATA AND
WORKSHOP FEEDBACK
CFA Institute and PRI thank the CFA Society of Japan for its help
in organizing our ESG Integration workshops in Japan. With their
assistance, we were able to work with investors and analysts to better
understand the current state of ESG integration.
governance and encourages investors to assess the overall level of (good/bad) governance and
for any improvements or deterioration in governance.
Investors want to mitigate downside risks and avoid ESG controversies; bad governance
is a proxy for bad environmental and social management and vice versa.
The level of ESG integration by an investor depends on the clients’ model. Passive
models do not allow as much for ESG integration, as they tend to apply voting and
engagement policies. Active management models can integrate ESG factors in the
portfolios and allow for divestment from investments that are overvalued due to ESG
factors.
Equities
Valuation for environmental and social issues vary. Reputational risk can be valued
through models by adjusting different forecasted financials/ratios either explicitly or
implicitly. Alternatively, reputational risk can be valued through impact on share prices,
which are sensitive to news flow such as ESG controversies.
Credit
Fixed-income investors look at delta and the change in value/risk/ESG. Environmental
and social issues are factors to investigate when analyzing the creditworthiness of issu-
ers, as these issues can affect their “ability to pay” and “willingness to pay.” As fixed-
income markets are less liquid, investors are likely to analyze ESG factors to ensure
that they don’t buy bonds that are highly likely to default, just in case they can’t sell the
bonds before an ESG event.
Liquidity risk can affect a company’s governance component and vice versa. If the
liquidity of a company’s issuances is low or reduces significantly, it is more important for
investors to ensure that the company has very good governance and a strong relationship
with its bondholders (if the company doesn’t, then the spread should compensate for low
124 WWW.CFAINSTITUTE.ORG
Drivers of and Barriers to ESG Integration: Survey Data and Workshop Feedback
DATA COVERAGE
There was a consensus among workshop participants that the current coverage of ESG
data is poor. There is a need for more comparable ESG data to increase the level of ESG
integration.
Japanese companies are incorporating ESG issues into their business but not always
disclosing it, according to one workshop participant. While there is limited data, this can
offer upside potential/alpha from unrealized company value.
ESG disclosure is still limited because companies may not realize the materiality of
ESG issues. ESG disclosure and value are not always connected by companies. More educa-
tion is needed here for companies as well as investors.
Finally, third-party research and company disclosures are only updated annually. One
needs to wait 11 months before seeing the latest research and ESG company disclosure.
Therefore, there is an issue with disclosure not being regularly updated, especially when it
is a company that starts reporting ESG data, and there is nothing to compare it with until
the company reports again in a year.
EDUCATION
There was a recognition among workshop participants that ESG integration is just begin-
ning to happen in Japan. There is a need for clear taxonomy of ESG terms and practices.
The mainstream is still not bought in fully on ESG, which could be due to a majority of
investors believing that ESG is socially responsible investing (SRI) or screening, which
reduces the investment universe. If people knew that ESG integration doesn’t reduce the
investment universe, then there would be more buy-in.
ESG risks and opportunities must be understood There is a need for clear
correctly, which is not always the case. How does one taxonomy of ESG terms and
value ESG? Is it purely from a qualitative assessment practices.
or does it need to be quantified? Is it appropriate to
adjust the discount rate?
Drivers
Risk management was the clear driver for ESG integration in the equity space in Japan,
though client demand seemed to drive demand on the fixed income side.
There is more concern over the possibility of downside risk caused by ESG issues. ESG
issues are considered more in negative events and less so in positive events. Environmental
and social factors can have a negative effect on prices, but environmental issues are being
studied to identify positive valuations.
For both equities and bonds, client demand is key in Japan. Client demand and fidu-
ciary duty are interrelated. The participants who believe fiduciary duty is a driver are likely
to be asset owners.
Asset flow is an incentive, as it generates fees for investment managers. If managers
are incentivized to conduct ESG integration, then more ESG integration will happen plus
more ESG products will be available with more asset owners allocating capital to them.
This will then have an impact further down the investment value chain as more capital will
flow to companies that have good or improving ESG performance and away from compa-
nies with bad or deteriorating ESG performance.
126 WWW.CFAINSTITUTE.ORG
Drivers of and Barriers to ESG Integration: Survey Data and Workshop Feedback
Barriers
Lack of understanding of ESG in Japan coupled with a lack of data and lack of ESG
products delivering returns are barriers to ESG integration in Japan. Credit rating
agencies are already including governance issues but doing little on environmental
and social issues.
There needs to be more evidence of investment
There needs to be more evidence
benefits for investors to integrate ESG more.
of investment benefits for
One workshop participant noted that more case
investors to integrate ESG more.
studies are needed that are relevant to Japanese investors
and based on Japanese companies/issuers.
Drivers and barriers differ between active (more opportunity-driven) and passive
investors. Smart beta offers a playing field for passive investors, i.e., the opportunity to
create new ESG products. The survey should look at passive and active investors separately
especially the impact of lower fees on the prevalence of ESG integration.
Figure 26 shows the number of companies per sector in Japan with and without an ESG
disclosure score. The Japanese equity market is dominated by companies in the consumer
discretionary and financial sectors with 142 and 108 companies in each, respectively.
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128 WWW.CFAINSTITUTE.ORG
Trends in ESG Company Data
Consumer staples (68), industrials (89), materials (64), and technology (68) are also large.
All sectors have more than the seven companies marking the limit as to whether they are
included in our analysis of the median ESG disclosure scores.
Overall, the coverage of ESG reporting is very high, with 94.4% of listed Japanese
companies reporting on ESG factors in 2016. Broken down into sectors, 100% of commu-
nications, energy, technology, and utilities companies reported on ESG factors, whereas
consumer discretionary (97.2%), consumer staples (95.6%), health care (97.7%), industri-
als (98.9%), and materials (98.4%) are all above 95%. For health care, industrials, and
materials, these high percentages meant that only one company in each sector did not
disclose on ESG factors. The only sector pulling the average down is the financial sector,
where only 76.9% of companies reported on ESG factors in 2016. When broken down into
environmental, social, and governance scores, it is evident that all companies with an ESG
disclosure score have reported on governance factors.
Social disclosure is also common. In the energy (100%), health care (90.9%),
industrials (93.3%), materials (96.9%), technology (92.7%), and utilities (100%)
sectors, more than 90% of companies report on social factors. The coverage in
consumer discretionary and consumer staples is also relatively high, with 83.1% and
88.2% coverage, respectively, whereas only 68.0% and 60.9% of companies in the
communications and financials sectors report on social factors. The least reported
theme is environmental factors. The energy (100%), materials (93.8%), and utilities
(100%) sectors are the only sectors with more than 90% of companies reporting
on environmental factors, with the industrials sector being just behind at 89.9%.
Communications and financials also have the lowest coverage in environmental
reporting, with coverage of 36.0% and 51.9%, respectively, whereas the remaining
sectors have coverage around 80%.
Figure 27 shows the development of the median ESG disclosure score across sectors
from 2011 to 2016. As seen in the figure, the scores are similar across sectors and did
not develop significantly in those five years. The largest increases happened in the con-
sumer staples, energy, and financials sectors. These sectors saw increases from 30.58 to
33.88, 37.81 to 41.74, and 16.67 to 20.61, respectively. Three sectors experienced a fall in
the median disclosure score, namely, communications (13.84 to 13.64), health care (37.6 to
34.71), and industrials (35.54 to 34.92).
In 2016, the sectors with the highest median ESG disclosure score were energy (41.74),
materials (40.08), and utilities (41.32) sectors, with technology taking fourth place at 36.98,
whereas the sectors with the lowest median disclosure scores are in the communications
and financials sectors at 13.64 and 20.61, respectively. There is a clear connection between
reporting on ESG factors and the median ESG disclosure score. The three sectors with
100% coverage, as seen in Figure 26, were three of the four highest scorers, and the same
is true for the bottom.
FIGURE 27: MEDIAN 2011 AND 2016 ESG DISCLOSURE SCORES FOR LISTED COMPANIES
DOMICILED IN JAPAN
160 45
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Companies reporting on ESG factors ESG score (2016) ESG score (2011)
Figure 28 shows the breakdown of the 2016 median environmental, social, and
governance disclosure scores. The governance disclosure scores are higher than the
environmental scores and social scores. The governance score is very similar across
sectors, with the communications, consumer discretionary, consumer staples, financials,
health care, and industrials sectors all having a median governance disclosure score of
46.43. The materials, technology, and utilities sector scores a bit higher at 51.79, and
the energy sector has the highest median governance disclosure score at 57.14. The
convergence indicates strong standardization across the Japanese market.
Despite having lower coverage, the median environmental disclosure scores are higher
than the social scores in all sectors except communications and financials. However, the
environmental scores are significantly lower than the governance score, with the lowest
difference being in the utilities sector (governance, 51.79; environmental, 44.83). The
consumer discretionary, consumer staples, energy, health care, industrials, materials, and
technology sectors have similar median environmental disclosure scores ranging between
33.33 to 41.09. As mentioned, the communications and financial sectors have lower envi-
ronmental disclosure scores than social disclosure scores and are both very low at 16.26
and 17.41, respectively.
130 WWW.CFAINSTITUTE.ORG
Trends in ESG Company Data
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Companies reporting on ESG factors Environmental score Social score Governance score
The median social disclosure scores follow the environmental disclosure scores, as
seen in Figure 28. Apart from communications and financials still being outliers with low
scores, the most striking score is that of the utilities sector, which has a median social dis-
closure score of 25. Interestingly, the utilities sector had a median governance disclosure
score among the second highest band and the highest median environmental disclosure
score (44.83) of all 10 sectors. The other sectors have relatively similar median social dis-
closure scores at 28.07 (consumer discretionary, consumer staples, and industrials), 31.58
(energy, health care, and technology), and 33.33 (materials). Except for the utilities sector,
the pattern follows governance, environmental, the overall ESG disclosure score, and the
coverage of ESG disclosure in general, i.e., the energy and materials sectors being among
the highest scorers and the communication and financials at the bottom.
EQUITIES
Research
Japanese equity practitioners frequently integrate qualitative ESG factors into their
investment research from both a risk and an opportunity perspective. Many consider
that an improving ESG profile is conducive to the sustainable growth of enterprise value,
while a rapid deterioration could increase the likelihood of damage to enterprise value.
132 WWW.CFAINSTITUTE.ORG
Investment Practices of Local Practitioners: Equities and Fixed Income
IS
YS
NAL RI
A ESG and financial risk SK
O
RI exposures and limits M
ENA AN
AG
SC Portfolio scenario
EM
analysis
EN
SE
CU
T
Forecasted RI
Internal credit TY
assessment financials & ratios VA
RESEARCH
LU
AT
IO
N—
Relative
ESG-integrated Centralized Value-at-risk
FIX
Forecasted ranking
research research analysis
financial
ED
ratios note dashboard
INC
Materiality ESG agenda at
OME
framework (committee)
meetings
Individual/
collaborative/ Relative
Tactical asset SWOT analysis
ESG policy value
allocation Valuation INTEGRATION engagement analysis/
spread
S E CU R I T
multiples
analysis
Internal ESG Voting
research
Y VA
LUA
ASS
Duration
ET A
IO N
Red-flag
analysis
indicators
—
LLO
Valuation-model
EQ
variables
UI
TI
benchmark)
TIO
ES
N
CT
RU
N ST
CO
L IO
Portfolio weightings
TFO
POR
Security Valuation
Equity practitioners sometimes integrate ESG factors quantitatively in their forecasted
financials but mainly through direct adjustments of valuation model variables. For
example, governance-related information obtained through engagement can be
incorporated in profit growth estimations. Analysts may adjust 3−5-year earnings
estimates to integrate ESG and competitive scores. Others expect that higher-scoring
ESG companies are likely to outperform the market in the long term and deliver higher
return on equity (ROE).
Where the impact of ESG factors on corporate performance is more diffused,
practitioners may reflect ESG factors by adjusting the premium or discount of enterprise
fair value/discounted cash flow valuation. Some advanced practitioners conduct scenario
analysis on a company’s cashflows and discount rates based on its ESG scores.
Portfolio Construction
Some Japanese practitioners are integrating ESG factors into their buy/sell/hold and
overweight/underweight/neutral decisions, predominantly through adjustments to
weightings given to companies and sectors. For example, companies expected to achieve
sustainable long-term growth and trading at prices lower than practitioners’ valuations can
be prioritized for inclusion. Another mechanism for ESG factors to feed through is via the
recommendation ratings made by equity analysts/investment committee, which already
include financially material ESG factors. ESG factors such as a company’s competency to
satisfy social needs can also be used as a proxy for a source of alpha in different active
strategies.
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Investment Practices of Local Practitioners: Equities and Fixed Income
FIXED INCOME
Research
Fixed income practitioners integrate ESG factors less frequently than their equity
counterparties. Where they do, their practices are mostly still being developed. Sovereign
practitioners make use of ESG research less frequently than do corporate bond
practitioners.
Most integrate ESG factors qualitatively; for example, environmental and social factors
may be seen to increase reputational and headline issuer risk, while weak governance may
have a detrimental impact on corporate bond prices via compliance issues. As is the case
for most fixed-income practitioners, the main focus is on the contribution of ESG factors
to financial downside, and in particular to significant events and systematic risks that may
affect issuer creditworthiness.
Fixed-income investment managers and research analysts typically collect ESG data
through different sources such as internal ESG teams, equity research analysts, and
databases provided by a third parties, as well as through direct discussions with bond
issuers.
Frequently assessed governance factors across the board include the presence of
controlling shareholders, the composition ratio of independent directors and independent
auditors. For sovereign issuers, it may include budgetary prudence of sovereign issuers.
However, practitioners also recognize that the materiality of ESG factors varies by industry.
For sectors such as power generation, energy, and manufacturing, future business
development may be assessed in relation to any environmental risks and the company’s
ability to minimize/manage those. Regulated industries such as banks and insurance
companies may be scrutinized for their ability to meet regulations.
Security Valuation
Fixed-income practitioners do not often integrate ESG factors in their security valuation.
The few that do will reflect ESG analysis in their internal credit scores. Selected practitio-
ners try to assess the impact of ESG factors on the issuer’s fundamentals. Integrating ESG
factors into buy/sell/hold and overweight/underweight/neutral decisions is not common
for Japanese fixed-income practitioners.
In your opinion, what is the state of ESG disclosures in Japan? How has this level of
disclosures changed over the last five years?
In the past, Japanese companies might have been a little too humble to disclose
their nonfinancial information to outside investors. However, based on an idea that ESG
disclosure is an important tool for the companies to have a constructive engagement
with stakeholders, GPIF has promoted information disclosure in several ways, such as
incentivizing companies to disclose more information so that it gets easier for them to
be incorporated in ESG indices, or asking external asset managers to select excellent and
most improved integrated reports and highlighting them in GPIF’s website. As a result, our
survey shows more and more companies are on their way to disclosing ESG information.
Many companies have already prepared to publish integrated reports, or at least have
planned such. GPIF also has begun to publish an “ESG Report” yearly, reviewing our own
ESG activities. This review requires information provided by every actor in the investment
chain, so that this publication itself is a way to encourage disclosure.
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Interview with a Japanese Major Market Player: Government Pension Investment Fund (GPIF)
Do you see any differences in the manner in which ESG integration is carried out in equities
versus fixed income?
In the equity, GPIF has two major channels in terms of ESG integration: ESG indices
and ESG-themed engagement activities, and we are already working on it. In fixed income,
on the other hand, we have just started to study how to incorporate ESG. Working with
the World Bank Group, we published the final report last April. This report points out
some constraints in the wider adoption of ESG considerations in fixed-income markets
compared with that in equities, such as difficulty of promoting engagement with issuers, or
shortage of bond indices and investment products. You can find the details in the report
and the press release on the GPIF website as well as the World Bank Group website.
How do you see ESG integration and disclosure evolving in Japan over the next five years?
Since the law does not allow GPIF to directly invest in equities, we cannot intervene
in companies’ ESG integration or disclosure. However, we continue to encourage our
external asset managers to have constructive dialogue with portfolio companies, and to
examine the impacts of our own ESG activities. We hope this movement will not end up as
a mere trend.
TABLE 26: THE IMPACT OF ESG ISSUES IN 2017 AND THE EXPECTED IMPACT IN FIVE
YEARS’ TIME (2022) ON SHARE PRICES, CORPORATE BOND YIELDS/SPREADS,
AND SOVEREIGN DEBT YIELDS
AFFECTED IN 2017 WILL AFFECT IN 2022
ESG ISSUES IMPACT ON SHARE PRICES
Governance 71% 78%
Environmental 22% 56%
Social 22% 47%
ESG ISSUES IMPACT ON CORPORATE BOND YIELDS/SPREADS
Governance 55% 62%
Environmental 3% 45%
Social 3% 31%
ESG ISSUES IMPACT ON SOVEREIGN DEBT YIELDS
Governance 34% 55%
Environmental 3% 48%
Social 10% 41%
Note: Percentages represent respondents who answered “often” or “always.”
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The Impact of ESG Factors on Capital Markets and Investment Practices: Survey Data
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DRIVERS OF AND BARRIERS TO ESG
INTEGRATION: SURVEY DATA AND
WORKSHOP FEEDBACK
CFA Institute and PRI thank the Singapore Exchange for its help in
organizing our ESG Integration workshops in Singapore. With their
assistance, we were able to work with investors and analysts to better
understand the current state of ESG integration.
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Drivers of and Barriers to ESG Integration: Survey Data and Workshop Feedback
Drivers
Client demand is seen as the main driver of ESG integration in Singapore, while in most
other markets client demand was seen as the second most important driverafter risk
management. The asset management business is driven by clients. Investors are driven to
do ESG integration for ESG-conscious clients.
Risk management is still seen as a key driver of ESG integration, just not the main
driver. The risk approach is almost always to look at ESG with a risk lens, i.e., avoid large,
one-off hits on prices. The “opportunity” approach doesn’t cross people’s minds and is not
properly understood. It is not clear what an ESG opportunity isan ESG opportunity can
be either generating alpha from an ESG theme or generating alpha from best-in-class
company(ies) in a sector.
There were divergent views on how regulation can affect the levels of ESG integration.
Some were in favor of regulation to drive integration into the culture of society and the
investment industry. But others felt that it would put
ESG in a negative light because it would be thought of One workshop participant
as another compliance exercise or an increase in the noted that ESG is a
costs that the fund must bear. differentiator that can attract
One workshop participant noted that ESG is assets and clients. This drives
a differentiator that can attract assets and clients. investors who are aware of
This drives investors who are aware of the benefits of the benefits of doing ESG, i.e.,
doing ESG, i.e., it can win ESG mandates and ESG- it can win ESG mandates and
conscious clients. ESG-conscious clients.
Barriers
A lack of historical and comparable ESG data and a lack of proof that ESG integration drives
performance were the main barriers to ESG integration cited by workshop participants.
There were several conversations among workshop participants around the complexi-
ties of ESG and how difficult it was to get consensus. For instance, does ESG need to be so
complicated? Why so many terms? It would be easier if there were harmonization and better
taxonomy to bring standardization of data and terminology. ESG is still a highly ambiguous
term to many people, and it is thought of simply as negative screening in many circles.
There is not enough ESG information in professional courses and qualifications,
according to many participants. Educational and training efforts need to be improved.
This would help achieve buy-in from younger generations.
Performance attribution of the benefits of ESG is too vague and not clear. Studies on
outperformance focus on Europe and the United States. More studies are needed on Asian
companies and funds. One participant noted that we have case studies that show the benefits
of ESG but do not highlight the opportunity costs, which should be done hand-in-hand.
The lack of comparable and historical data is a universal problem that came up in
the conversations in Singapore. Data coverage is low. The group members were positive
about data coverage and quality improving in the future, including for small companies,
but there are still large gaps in the data that need to be filled. At the same time, there is
a lot of data but it is difficult to make sense of the data sometimes. It is unclear about the
links, relationships, and causation between ESG and performance.
One conference participant stated that data is actually available, and not just from the
sell-side; there are also many models that companies can adopt and are freely available. So,
there is data available and there are models that can be adopted, but has not become a
systematic part of the investment process.
Demand is the key driver of ESG integration in Singapore, but demand is still relatively low.
ESG mandates are needed. Asset owners are not making explicit demands for ESG practices in
their mandates. If they did, investment managers would respond. There is a concern that more
education is needed from a client perspective as well. Many clients don’t understand ESG; it
overcomplicates investment for them.
Finally, workshop participants noted that there
isn’t a culture at the moment in certain parts of Asia Demand is the key driver of ESG
for ESG integration. Singapore may be slightly more integration in Singapore, but
advanced on ESG integration than other parts of demand is still relatively low.
Asia and have more advanced understanding of ESG. ESG mandates are needed.
Asset owners have responsibility in Asia to drive that
culture, and some countries are more developed and
have a better culture than others.
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TRENDS IN ESG COMPANY DATA
We partnered with Bloomberg to analyze the transparency of ESG disclosure in each market for com-
panies with a market cap of above USD 1 billion. The information in these figures comes from the
analysis of Bloomberg’s ESG disclosure scores, which are based on publicly available data; they are
a score of how companies report on ESG, not necessarily how they perform. The score is based on
company disclosures on different environmental, social, or governance disclosure points. Each type of
disclosure is scored from 0 to 100, and then aggregated to a single environmental, social, or gover-
nance score. These are again aggregated to a combined ESG score. We have only included scores for
sectors with more than seven listed companies. (For more information, see “Appendix: Methodology.”)
Figure 33 shows the distribution and number of listed companies domiciled in Singapore
in 2016 with a market cap of more than USD 1 billion. As seen, the market is very small
and only has 59 companies in total, of which 44 (74.6%) report on ESG factors. With a
limit of seven companies to analyze the median ESG disclosure score, all sectors except
the financial sector are under the limit. Of the few companies in the market, most report
on ESG factors. In the communications, energy and health care sectors, all companies
(four, two, and one, respectively) report on ESG factors. In the consumer discretionary
sector, four of five companies report, and in the industrials sector five of six companies
report. In the technology and utilities sectors, one of two companies report in each sector.
30
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The consumer staples sector consists of seven companies, of which four report on ESG
factors. The financial sector is the largest sector in Singapore per number of listed compa-
nies domiciled there, with 33 companies. Of these, 20 report on ESG factors, which is just
under two-thirds of companies.
Due to the low number of companies both in total and in each sector, the analy-
sis will be done on an aggregate level of the entire Singaporean market. Figure 34
shows the median environmental, social, and governance disclosure score for 2011 and
2016 for the entire aggregated market. Consistent with other markets, the governance
score is higher than the social and environmental scores. All three themes have seen
increased reporting over the five years, although social reporting has grown much
more than the two other themes. The governance score went from 48.21 to 51.79, show-
ing an aggregate median governance disclosure score similar to the Australian and
Hong Kong SAR markets. The median social disclosure score went from 14.04 in 2011
to almost double that, 28.07, in 2016, whereas the median environmental disclosure
score went from 11.63 to 17.45.
Overall, among the companies that report on ESG factors: governance disclosure is
the most common practice; there is more reporting per company; and relatively extensive
reporting dates back to before 2011.
Figure 35 shows the breakdown of the 2016 median environmental, social, and
governance scores based on the size of the companies. Of the 44 companies reporting
on ESG factors, 8 were small-cap (market cap, USD 1-2 billion), 29 were mid-cap (market
cap, USD 2-10 billion), and 7 were large-cap (market cap, USD >10 billion). All companies
FIGURE 34: MEDIAN ENVIRONMENTAL, SOCIAL, AND GOVERNANCE SCORES FOR 2011 AND
2016 FOR LISTED COMPANIES DOMICILED IN SINGAPORE
60 2016
2011
50
Median disclosure score
40
30
20
10
0
Environmental score Social score Governance score
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Trends in ESG Company Data
60
Median disclosure score
50
40
30
20
10
0
Small cap Mid cap Large cap
Environmental Social Governance
reported on governance issues, which shows high median disclosure scores of 51.79,
51.79, and 60.71 for small-, mid-, and large-cap, respectively. Furthermore, all large-
cap companies reported on social factors, making it possible to show the median social
disclosure score of 28.07. This score is slightly lower than the mid-cap social disclosure
score of 31.58, although the coverage in mid-cap was not as good, with 26 of 29 companies
reporting on social factors.
For small-cap, six of eight companies reported on social and environmental factors,
leaving both median scores out of the analysis. For large-cap companies, the coverage
also fell to 6 companies for environmental reporting, leaving them out of the analysis. Of
29 mid-cap companies, 26 reported on environmental factors, giving it the same coverage
as social reporting. The median environmental disclosure score is lower than the social
score at 18.99 and 31.58 respectively.
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Interview with a Singapore Major Market Player: Manulife Investment Management
be too high. When appropriate, we also seek to have regular engagements with issuers to
understand their ESG risk profiles more comprehensively, particularly where ESG issues
negatively impact our internal ratings.
Please give an example of a company where ESG factors impacted its investment deci-
sions (you do not need to name the company).
Production of palm oil in Asia is a controversial ESG issue because of the associa-
tion with many negative environmental and social impacts, including deforestation, water
usage, loss of biodiversity, devastating impact on the underlying peatland, labor safety,
etc. We believe these negative impacts caused by unsustainable palm oil production could
result in credit risks to companies in the palm oil sector, because of market access risks and
operational risks where sustainability certifications of plantations cannot be maintained.
In order to capture these ESG risks in our internal credit rating framework, palm oil
producers generally receive one notch-down to reflect the potential impacts of ESG risks
to the credit profiles. We have also excluded some Asian companies within the palm oil
sector based on our analysis.
What techniques have you used to promote ESG integration in your firm?
We believe that strong collaboration between the ESG and investment team is the key
to promote effective ESG integration. Since establishing a dedicated ESG team in Asia in
September 2016, the ESG team has worked with the investment team to implement several
initiatives to promote ESG integration.
For example, we have rolled out an ESG research note template for recording ESG
research and ESG company engagements, which are published to a central research
platform. ESG data and ratings received from our core external research provider are
integrated into our key IT platforms, including FactSet and Bloomberg, so that portfolio
managers and analysts can see and use this data seamlessly in their investment process
and in portfolio monitoring. The investment team also collaborated with the ESG team to
develop industry-specific ESG handbooks that help investment teams to assess a company’s
ESG risks and opportunities in the context of the factors that are most material to that
industry. Periodic ESG training on current trends and specific themes are organized and
led by the ESG team as well as external experts. Further, our participation and leadership
in industry groups such as the Asian Corporate Governance Association and the Asia
Investor Group on Climate Change has enabled us to participate in several collaborative
engagements with Asian companies, which have resulted in information about our peers’
collective views on ESG to inform our investment team and their ongoing efforts.
Our efforts in Asia mirror the strategies being employed globally at Manulife
Investment Management to advance ESG integration among our global boutique teams.
How do you see ESG integration developing in Singapore over the next five years?
Integration of ESG within investment management has been accelerating across the Asia
region, including Singapore, during the past few years. We have seen ESG advance from an
esoteric concept in Asia a decade ago to something that can no longer be ignored. The growth
has coincided with improving data and disclosure from our issuers. However, there is
still much work to be done. With institutional clients and consultants now placing ESG
integration as a focus within their investing decision process, investment managers will
need to continue to develop and evolve. We see education and acceptance by clients,
particularly at a retail fund level, as a key driver for continued development. We also see
increasing demands from millennials for ESG funds and products.
At the issuer level, there will be more standardization on environmental and social data
from issuers, so that it will be easier for investors to evaluate and integrate ESG data to their
fundamental analysis. We have seen how the data on governance has become relatively more
mature, and we expect that environmental and social data will follow a similar journey. We
believe issuers, instead of disclosing a patchwork of nonstrategic ESG data, will focus on
disclosing ESG data that is material to investor investment decisions in the future.
What do you think is necessary to accelerate this growth in ESG integration in Singapore?
The Asian investment management industry is gradually moving in the right direction.
Firms are building up resources, and we are beginning to see more institutional clients
demanding ESG best practices from their managers. To accelerate this growth, major
asset owners in the region, who sit atop the investment chain with long-term investment
horizons, must start to recognize the importance of ESG and integrate ESG factors
throughout the investment cycle, starting with the manager selection process. Manulife
Investment Management is part of this growth in ESG integration in Singapore—we have
been talking with the Singaporean Government and its agencies on various topics related
to ESG integration in asset management.
In addition, we believe more education would be very helpful to build the awareness
of individual finance practitioners, particularly with reference to the overseas experience,
such as in the European Union.
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INTERVIEW WITH A SINGAPORE MAJOR
MARKET PLAYER: SGX REGCO
Interview with Tan Boon Gin, CEO of SGX RegCo.
What changes have you seen with regard to ESG investing during recent years?
ESG investing has increasingly gained traction in recent years. In Singapore, there
is anecdotal evidence that Singapore consumers and investors increasingly care about
sustainability. Most recently in November 2018, in the Sunday edition of the local broad-
sheet the Times highlighted a trend among millennials investing in firms or funds that
target specific social or environmental outcomes. Green bond issuances in Singapore have
also continued to grow since the first green bond issuance in 2017 by City Developments
Limited, one of Singapore’s largest developers. It has been estimated that the Association
of Southeast Asian Nations (ASEAN) will need US$200 billion in green investments annu-
ally till 2030. There is an immense opportunity to be tapped by all.
What is your role as a securities exchange in promoting ESG investing? How are you
encouraging practitioners to consider ESG factors in their portfolios?
Besides our role as a regulator in the financial market, we also have a duty to
ensure that the market develops to meet the expectations and needs of the future. We
believe that widespread adoption of sustainable business practices needs to be driven by
both market forces and government and regulatory bodies like ourselves. In a speech in
November 2018, the Deputy Prime Minister of Singapore, Tharman Shanmugaratnam,
emphasized the need for governments, businesses, and citizens to work together to
achieve sustainability. Such tripartite partnerships have been proven to yield more
efficient and effective results than relying on either market forces or regulatory
intervention alone.
What is your opinion on the level of ESG disclosure in the local market? How has the
level of disclosure changed from three years ago?
As a market regulator, it is our responsibility to ensure that all information which is
material and relevant for investors to make investment decisions is disclosed. As the link-
ages between sustainability performance and corporate financial performance become
better understood, one is drawn to the irresistible conclusion that ESG sustainability is one
of the critical aspects of a company’s business that investors need to know.
We have seen a marked increase in the level of ESG disclosure since Singapore
Exchange Ltd (SGX) mandated sustainability reporting in 2016—SGX-listed issuers
are required to prepare an annual sustainability report in respect of financial years
ending on or after 31 December 2017. The inaugural sustainability reports by first-
time reporting companies are progressively being published, and we are happy to
report that almost all SGX-listed companies with December year-ends have issued a
sustainability report.
Going forward, we intend to review companies’ sustainability report from this
first round of reporting and will actively engage with companies to understand the
difficulties that some companies may have and how we can help them, for example,
by providing more resources. Through this review, we also hope to better understand
investors’ expectations on the level and standard of sustainability reporting, and seek
to improve and enhance companies’ disclosures so as to align their disclosures with
investors’ demands.
Are you aware of investors asking companies questions about ESG issues and for them to
provide more ESG data?
We are aware of increased engagements between investors and companies on ESG
issues. As a market regulator, we are interested to ensure that our listed issuers are
producing decision-relevant information that investors want. As much as companies
are adapting to the new world, so are investors. It is not clear to us if all investors want the
same thing. Sustainability has become a broad topic that encompasses a wide spectrum
of interest, from climate change to no plastic, from fair wages to diversity. At the same
time, these diverse areas do not lend themselves naturally to easy standardization and
comparability. We believe that with more dialogue between and greater consensus among
all stakeholders, we will arrive at generally acceptable standards of disclosure that would
help everyone.
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Interview with a Singapore Major Market Player: SGX Regco
How will ESG investing develop in Singapore over the next three years?
ESG investing will only become increasingly relevant due to the region’s urgent
environmental concerns. This is also illustrated by the Singapore Government’s focus on
the sustainability agenda through the introduction of measures such as implementing a
carbon tax (which just came into force on 1 January 2019), regularly enhancing vehicular
emission standards, and providing grants to help businesses more sustainable. Businesses
and investors will need to manage the ESG impacts to their business or investments alike,
while leveraging the sustainability opportunities that abound. The level of ESG investing
will only grow.
■■ Australia (n=36);
■■ Mainland China (n=40);
■■ Hong Kong SAR, China (n=80);
■■ India (n=42);
■■ Japan (n=91);
■■ Singapore (n=50).
Figure A.1 provides the demographics of the survey respondents from the APAC region.
1
PRI commissioned YouGov to set up and host the online survey on YouGov’s bespoke, secure survey platform.
The survey was available to complete in a variety of languages. PRI and CFA Institute promoted the survey via
invitations to the workshops discussed later in this report.
158 WWW.CFAINSTITUTE.ORG
Methodology
Overview of respondents
Organization type Asset classes covered/overseen
Asset manager 40%
Consultant 12%
Sell-side firms and brokers 11% 20%
Company 8% Equity
Asset owner 6% 39%
Fixed income
ESG research provider 5%
Membership organization 4% Both
Financial advisor 2% Neither
Other
30%
12%
12%
Q1. Which of the following best describes the type of organization you work for?
Q2. What is your job title?
Q3. Which of the following asset classes do you cover/oversee?
Q4. In which of the following markets are you based?
Base: All respondents (339)
WORKSHOPS
We held 23 workshops to accompany the survey. Ten workshops were held in the APAC
region, including workshops in Australia, Mainland China, Hong Kong SAR, China, India,
Japan, and Singapore (figure A.2).
The purpose of these workshops was to provide color to the results of the survey. Workshop
participants were split into groups of six to eight and discussed and contributed their views on
the preliminary results of the survey. From the workshops, we were able to collect insights
from local practitioners who are predominantly non-ESG investment professionals.
The dataset includes companies with a FY2016 market cap above USD 1 bn extracted on
21 January, 2019. It was broken down further into small (market capitalization between $1bn
and $2bn), mid (market capitalization between $2bn and $10bn), and large cap (market
capitalization more than $10bn).
The dataset has combined ESG disclosure scores for 2011 and 2016 for the 10 different
Bloomberg Industry Classifications (BICs): Communications, Consumer Discretionary,
Consumer Staples, Energy, Financials, Healthcare, Industrials, Materials, Technology, and
Utilities. It also contains environmental, social, and governance scores per sector for 2016.
Bloomberg’s ESG disclosure scores are based on publicly available data and are a
score of how companies report on ESG, not necessarily how they perform. The score
is based on company disclosures on over 100 environmental, social, or governance
disclosure points. Each type of disclosure is scored from 0 to 100, and then aggregated
to a single environmental, social, or governance score. These are again aggregated to a
combined ESG disclosure score. Some factors are given a higher weight depending on
their importance, and the scores are also tailored to each industry. Bloomberg accounts
for industry-specific disclosures by normalizing the final score based only on a selected set
of fields applicable to the industry type; for example, “Total Power Generated” is counted
into the disclosure score of utility companies only.
The ESG disclosure scores shown in the regional reports are median scores to avoid
skewing of the data with extreme values. Due to the scores being medians, they cannot
be aggregated across sectors. The representativeness of the data varies among markets, as
some markets have more listed companies.
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Methodology
AUTHORS
Matt Orsagh, CFA, Director of Capital Markets Policy, CFA Institute
James Allen, CFA, Head of Americas Capital Markets Policy, CFA Institute
Justin Sloggett, CFA, Head of Public Markets, PRI
Anna Georgieva, Manager, Public Markets, PRI
Sofia Bartholdy, Analyst, Investment Practices, PRI
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